UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
(MARK ONE)
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2005 Commission File No. 000-000-49723
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Money Centers of America, Inc.
(Name of small business issuer in its charter)
DELAWARE 23-2929364
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
700 South Henderson Road
Suite 325
King of Prussia, PA 19406
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(Address of principal executive offices, Zip Code)
(610) 354-8888
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(Issuer's telephone number)
Section registered under Section 12(b) of the Exchange Act: None.
Securities registered under Name of Each Exchange
Section 12(g) of the Exchange Act: on Which Registered:
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Common Stock, par value $.01 per share None
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filings requirements for the past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The registrant's revenues for the most recent fiscal year were
$19,409,238.
The aggregate market value of the voting common stock held by
non-affiliates of the issuer as of March 31, 2006 was approximately $2,602,870
(based on the average closing bid and asked prices of the registrant's common
stock in the over-the-counter market as of March 31, 2006.
As of March 31, 2006, 25,291,136 shares of the issuer's common stock,
par value $.01 per share, were issued and outstanding.
Documents Incorporated by Reference: None.
TABLE OF CONTENTS
PART I
ITEM 1 - DESCRIPTION OF BUSINESS..........................................1
ITEM 2 - DESCRIPTION OF PROPERTY.........................................14
ITEM 3 - LEGAL PROCEEDINGS...............................................14
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............14
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........15
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......18
ITEM 7 - FINANCIAL STATEMENTS............................................27
ITEM 8 - CHANGES IN AND DISCUSSIONS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................27
ITEM 8A - CONTROLS AND PROCEDURES.........................................27
ITEM 8B - OTHER INFORMATION...............................................28
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............29
ITEM 10 - EXECUTIVE COMPENSATION..........................................30
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..33
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................34
ITEM 13 - EXHIBITS........................................................35
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................36
FINANCIAL STATEMENTS .................................................F-1 - F-35
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB includes forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
known and unknown risks, uncertainties and assumptions about us that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," "believe,"
"estimate," "continue," or the negative of such terms or other similar
expressions. We caution that any forward-looking statement made by us in this
Form 10-KSB or in other announcements made by us are further qualified by
important factors that could cause actual results to differ materially from
those projected in the forward-looking statements, including without limitation
the risk factors set forth in this Form 10-KSB.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Money Centers of America, Inc. is a corporation existing under the laws
of the State of Delaware. The company's original Certificate of Incorporation
was filed on October 10, 1997 and a Restated Certificate of Incorporation was
filed on August 20, 2004.
Prior to March 2001, we were a development company focusing on the
completion of a Point of Sale ("POS") transaction management system for the
gaming industry. In March 2001, we commenced operations with the launch of the
POS system at the Paragon Casino in Marksville, LA.
On January 2, 2004, iGames Entertainment, Inc. acquired us pursuant to
our merger with and into a wholly-owned subsidiary of iGames formed for that
purpose. In addition, on January 6, 2004, iGames acquired Available Money, Inc.,
an operator of free-standing ATM machines in casinos. The business operations of
Available Money were combined with our business operations. As a result of the
acquisition of Available Money and our continued growth, we currently provide
services in 20 locations across the United States.
Our acquisition by iGames was accounted for as a reverse acquisition.
Although iGames was the legal acquirer in the merger, we were the accounting
acquirer since our shareholders acquired a majority ownership interest in
iGames. Consequently, our historical financial information is reflected in the
financial statements prior to January 2004. All significant intercompany
transactions and balances have been eliminated.
On October 15, 2004, pursuant to an Agreement and Plan of Merger dated
as of August 10, 2004 (the "Merger Agreement") by and between iGames and us,
iGames was merged with and into us. Pursuant to the Merger Agreement, the holder
of each share of iGames' common stock received one share of our common stock,
and each holder of shares of iGames' Series A Convertible Preferred Stock
received 11.5 shares of our common stock. Options and warrants to purchase
iGames' common stock, other than warrants issued as part of the merger
consideration in iGames' January 2004 acquisition of us (the "Merger Warrants"),
are deemed options and warrants to purchase the same number of shares of our
common stock with no change in exercise price. The Merger Warrants were
cancelled in exchange for 1.15 shares of our common stock for each share of
common stock purchasable thereunder.
As a result of this merger, iGames ceased to exist as a corporation and
we succeeded to the registration of iGames under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Act"), pursuant to the provisions of Rule
12g-3(a) promulgated under the Act. iGames was registered, and filed reports,
under the Act with the Securities and Exchange Commission (the "Commission") in
accordance with Section 12(g) of the Act.
We are a single source provider of cash access services and transaction
management systems to the gaming industry. Our core competencies are the
facilitation, processing, and execution of ATM, Credit Card Advance, POS Debit,
Check Cashing, stored value, marker, and merchant card services in the Gaming
Industry. As the suppliers to the gaming industry have consolidated service
offerings, we will meet the growing trend towards single source providers of
products and services to casinos and other gaming facilities worldwide. This
trend supports our business plan to offer a full range of cash access services
as well as to identify merger and acquisition candidates with discrete product
offerings that complement our existing offerings and will further support our
business model.
1
We intend to become a leading innovator in cash access and transaction
management services for the gaming industry. Our business model is specifically
focused on providing our full suite of cash access services through two distinct
deployment channels: 1) the traditional outsourced solution whereby the casino
operator contracts out all cash access services whereby we provide a complete
package of hardware, software and processing services to our customers, and 2)
the licensing of our ONSwitchTM Transaction Management System through licensing
agreements pursuant to which we sell an enterprise software application that
allows casinos to internalize the operation of these services which includes
providing their own hardware, service and maintenance.
We have identified the gaming industry as a niche segment within the
funds transfer industry that has significant growth opportunities. We are
confident that our full service and technology license deployment strategy
positions us to meet the needs of any gaming facility or jurisdiction in the
United States.
We currently have contracts to provide some or all of the cash access
services in 27 locations across the United States. Our locations are in the
states of California (18 locations), Nevada (3 locations), New York (2
locations), New Mexico (1 location), Wisconsin (1 location), Washington (1
location) and Colorado (1 location).
In 2005, our cash access technology facilitated 5,253,787 transactions
totaling $640,917,659.
Products
We have developed four primary products: credit/debit card cash
advance, CreditPlus Credit Services, Automatic Teller Machines ("ATMs") and
check cashing solutions. These products are the primary means by which casinos
make cash available to gaming customers. We believe that we have a distinct
advantage in the cash access industry because we offer all four of these
products, and each of our seven current casino customers utilizes all four
products although we offer them separately. We anticipate that a majority of
future casino customers will contract for all services. Currently, we provide
these services on a direct, full-service basis using our hardware, software and
personnel.
In addition to our core products, we commenced offering customers our
proprietary ONSwitch(TM) transaction management system in January 2006. With
ONSwitch(TM), casinos can license our software systems and use their own
hardware, personnel and capital to provide the cash access services to their
customers. We do not have any current customers using ONSwitch(TM) at this time.
ONSwitch(TM) Transaction Management System.
ONSwitch(TM) is a turnkey software solution that enables casino
operators to insource cash access operations such as ATM, cash advance, POS
debit, retail merchant card processing, automated ticket redemption, and
player's club redemptions.
Historically, casino operators have engaged third party processors such
as us to handle cash access operations, with the goal of driving more cash to
the gaming floor. These third party providers would install the equipment,
evaluate credit transactions, and provide the cash to casino patrons who were
seeking to tap available sources of cash.
Now, with ONSwitch(TM), casino operators have an extremely
cost-effective solution to eliminate the middleman, capture the profits from
cash access operations, and gain control of the customer experience.
ONSwitch(TM) couples Mosaic Software's Postilion electronic funds
transaction software platform with proprietary software for the gaming industry.
Postilion is at the forefront of next-generation payment processing software,
driving payments for some of the largest financial services companies in the
world through ATMs, POS terminals, phones, and Internet access points. We have
the exclusive right to resell Postilion software within the gaming industry.
We will generate revenues from licensing fees, transaction fees and
ongoing support, training and consulting fees rather than providing cash access
services. Although our revenues from a particular casino will be substantially
reduced, we will no longer incur the costs associated with on-site personnel and
equipment and interest expense on the substantial working capital required to
support our current services. This will enable us to support a much larger
customer base. We began marketing ONSwitch(TM) in January 2006. Although to date
none of our existing customers have decided to convert to the ONSwitch(TM)
transaction management system, we have provided them with the right to do so and
believe that the ability to convert will provide us with a marketing competitive
advantage with prospective customers.
2
In addition, with ONSwitch(TM) we will have the opportunity to create
an additional revenue stream through the financing of our licensing fees. Some
casinos will want to finance the ONSwitch(TM) license fee; this will give us the
opportunity to derive additional revenues from finance charges on the deferred
license fee payments.
Credit/Debit Card Cash Advance.
In March 2001, we introduced our first credit/debit card cash advance
("CCCA") product. Our CCCA products allow casino patrons to obtain cash from
their credit card, or checking account in the case of debit transactions,
through the use of our software and equipment. Our CCCA product accounted for
99,449 transactions and $2,398,500 in revenues (13% of total revenues) for the
year ended December 31, 2005.
In order to initiate a transaction, gaming patrons visit one of our
ATMs or kiosks located on the casino floor. Each kiosk houses a point-of-sale
terminal ("POS") equipped with our software. The ATM or kiosk terminal will
prompt the customer to swipe his/her credit or debit card and enter the dollar
amount requested. The terminal will then dial our centralized processing center
that electronically contacts the appropriate bank for an authorization or
disapproval. If authorized, the terminal will direct the customer to a casino
cage. Once at the cage, the customer will present his/her credit/debit card and
driver's license. A cage cashier will swipe the credit/debit card in one of our
terminals, which communicates with our central servers. After finding the
kiosk-approved transaction, a printer attached to the cage terminal will
generate a company check. The cashier will give the customer cash in the amount
requested after he/she endorses the system-generated check. The check is then
deposited by the casino into its account for payment from one of our bank
accounts and we debit the customer's credit/debit card. This transaction can be
accomplished without the gaming customer using a personal identification number.
For credit/debit card advances, customers pay a service charge typically between
6% and 9% of the amount advanced.
The CCCA product is distinguished from standard ATM transactions,
described below, in that either a credit or debit card can be used to initiate
the transaction, no PIN number is required, and the maximum withdrawal limits
typically imposed on ATM transactions are not applicable as the CCCA transaction
is initiated at our booth and is processed as a typical POS transaction instead
of as an ATM transaction.
We believe that we have several competitive advantages over competing
providers of CCCA services. First, our casino clients are able to access player
tracking and other valuable information from our website on a daily basis. This
information is collected when a customer uses our CCCA product. Competing
systems offer limited reporting, which typically is only available via hard copy
weeks after the month has ended. Our reporting is Internet-based and allows
customers to custom design a system to meet their reporting requirements. In
addition, customers have access to their information twenty-four hours a day,
seven days a week. Unique features of our PC-based systems are color,
touch-screen monitors, integration of all products in one interface, signature
capture technology and transaction prompting.
ATMs
Automated Teller Machines or "ATMs" are a growth market spurred on by
the development of less expensive "dial-up" automatic teller machines and the
opportunity to charge users transaction surcharges of up to $5.00 per
disbursement. We have access to all major bank networks and equipment suppliers.
Due to the highly fragmented nature of the ATM business, this service is highly
competitive, which has eroded margins and revenue growth potential. We are
currently providing gateway services to a wide range of national, regional and
international debit, credit and EBT networks. Additional links are being
established, including direct connections to national merchants as well as third
party, authorization and EBT providers. In addition to providing ATMs in casinos
in conjunction with our other services, we have contracts to provide
free-standing ATMs to 10 customers and we currently operate 29 ATMs at those
locations (of which 17 ATMs are not in casinos). Our casino-based ATMs do not
effectively compete with ATMs offered by banks and other financial institutions
as we are the only ATM providers in our casinos. ATM activities accounted for
4,798,884 transactions and $12,651,187 in revenues (65.2% of total revenues) for
the year ended December 31, 2005.
3
Transactions at our ATM machines are processed by Genpass Technologies,
a full-service ATM processing company that provides services to over 24,000 ATMs
nationwide. All ATM transactions are processed using Genpass' network and
Genpass provides all reporting, recordkeeping and related services. In addition,
Genpass provides all cash management and vault cash needed for our non-casino
ATMs. Genpass receives a per-transaction fee and charges us a fee for vault cash
equal to Genpass' cost of funds, currently the prime rate less 5/8%, on vault
cash used at non-casino ATMs. Genpass is one of several national ATM processors,
and although we currently are dependent on Genpass for this service we believe
that alternate providers are available on substantially similar economic terms.
Check Cashing
Check cashing services are provided at all of our casino operations.
When a casino patron requests check cashing at one of our service desks, we
initiate a check verification process using identification procedures and
software systems. Each transaction also provides additional data for our
customer database, which can be used in assessing the creditworthiness of the
particular customer. The system and software permit information to be gathered
and reported in an efficient and timely manner. We have designed and implemented
a credit rating system that utilizes this customer database to determine whether
a casino customer's check should be cashed. Check cashing involves the risk that
some cashed checks will be uncollectible because of insufficient funds, stop
payment orders, closed accounts or fraud. We assume 100% of the credit risk from
check cashing operations. This risk of collection is greater in new locations
where the amount of data in our database is smaller. Unlike all other companies
providing check services, we do not use a credit scoring system, as a credit
scoring system will decline many checks that we believe are acceptable risks.
Currently, we only guarantee checks that are cashed in one of our full service
money centers, where our employees are facilitating the transaction.
A second option for check cashing services is a check guarantee and
check verification process in which the casino uses POS terminals to scan the
customer's check and request remote authorization. We have formed an alliance
with a third party provider to offer this service option to our customers. We
intend to either acquire a company operating in this segment of the industry or
to build a proprietary system to offer this service to our customers. Under this
option, which is not yet in operation in any of the casinos we serve, we retain
100% of the credit risk.
A third option is for a casino to license our proprietary check-cashing
software and manage its own check cashing services. For a monthly licensing fee,
we will install and support our proprietary Windows-based check-cashing software
and train casino personnel regarding its proper use. This software can either
stand-alone or integrate with our credit card advance system. This is the same
software that we use in our full service money centers. This program streamlines
the process from check approval through collection of bad checks. Casinos will
have access to our national database that will provide check credit histories
for customers in casinos nationwide. Since most casinos wish to manage this
process internally, we believe that there is significant revenue opportunity for
this product. Under this option, which is not yet in operation in any of the
casinos we serve, the casino would assume 100% of the credit risk.
Check cashing activities accounted for 353,553 transactions and
$3,197,228 in revenues (17.4% of total revenues) for the year ended December 31,
2005. For that period, we incurred aggregate net losses from bad checks of
$801,313, representing .84% of the aggregate $94,553,802 in check-cashing
transactions processed.
CreditPlus Credit Services
Casinos in traditional gaming markets, like Las Vegas and Atlantic
City, rely on credit issuance for up to 40% of their revenues. These casinos
issue credit internally and rely on specialized credit reporting in their risk
management decisions. Prior to the launch of our CreditPlus product there was
only one company providing the specialized credit reporting that the gaming
industry relies on for its credit decisions.
Until recently, casinos in the $15 billion dollar a year Indian gaming
market had little or no ability to utilize credit issuance in their operations.
Under the state law compacts governing their operations, the majority of Indian
casinos are prohibited from offering credit to customers. Further, the capital
requirements necessary to develop the internal ability to offer credit on a
prudent basis prevented smaller properties from developing the capability. The
absence of a third party credit issuer capable of facilitating these
transactions compounded the problem. As non-Indian casinos extend credit
directly, there was no market need for a third-party credit provider, and
therefore no providers of this service. The other provider of specialized credit
reporting did not itself provide credit services.
Our CreditPlus platform allows players in Indian casinos to receive
credit for the first time and, based on an average transaction fee of 10%,
CreditPlus positions us to be at the forefront of what we estimate to be a $2
billion market. Currently we have a strong market position in providing credit
guarantee and credit management services to this highly profitable market.
4
The CreditPlus product has three distinct elements: Credit Reporting,
Credit Management and Credit Guarantee.
Credit Reporting. We have developed a proprietary database of credit
reporting information, based on prior transaction history with casino patrons.
Credit Management. Like our check cashing management software,
CreditPlus can be used to streamline the credit process from approval through
collection of bad debt. Casinos will have access to the CreditPlus system that
will provide check and credit histories for casino and retail patrons. Since
many casinos wish to manage this process internally, we believe there is
significant revenue opportunity with this product.
Credit Guarantee. Casino and retail customers can also access cash
through CreditPlus credit guarantee. The customer will fill out a CreditPlus
application. We then go through a check verification and credit underwriting
process similar to that used in check cashing to determine whether to extend
credit. Upon approval, the CreditPlus system will generate a marker for an
amount up to the credit line that we approved. Each marker is effectively a
check drawn on the customer's checking account that we agree to hold for up to
30 days. Most markers are repaid prior to the end of the holding period. Fees
are based on state regulations and the amount of time that we hold the marker.
In many cases, the customer will return to our location prior to our deposit of
the marker and request that a new holding period be established in exchange for
an additional fee. These transactions are approved and facilitated at our full
service money centers and shortly will be available through the casino cage via
an approval code transmitted through the CreditPlus system. We assume 100% of
the credit risk from the issuance of the marker.
CreditPlus accounted for 1,901 transactions and $114,583 in revenues
(.62% of total revenues) for the year ended December 31, 2005. For that period,
we incurred aggregate net losses from nonpayment of advances of $27,079,
representing 2.6% of the aggregate $1,026,063 in transactions processed.
CreditPlus is in place at 2 casinos.
In addition to our four core services, we have developed our "Cash
Services Host Program." Under the program, we have specially trained and
equipped employees, known to the casino and identifiable as our Cash Services
Hosts, deployed on the casino floor. The Cash Services Hosts are available to
casino customers to provide cash access services at the gaming table or slot
machine, thus eliminating the need for the customer to leave the gaming table or
slot machine to obtain funds. This is viewed as an amenity by the customer and
increases the gaming activity thereby enhancing the casino's revenues. By making
our services more accessible to the customer, it increases our transaction
activity and revenues. The Cash Services Host Program was operating at 1 casino
and was introduced in 3 additional casinos in 2005. The Cash Services Host
Program accounted for approximately $512,000 in revenues (2.6% of total
revenues) for the period ended December 31, 2005.
Omni Network
In January 2006 we also introduced the Omni Network, a free shared
credit data and responsible gaming network for the gaming industry. We built the
Omni Network with the idea that credit and responsible gaming data belongs to
the gaming operators and is necessary for the protection of consumers and the
integrity of gaming operations.
The Omni Network is comprised of real-time credit and responsible
gaming data garnered from a transaction database that spans the entire United
States and soon the Caribbean and South America. Free access to this
comprehensive database empowers casino operators to make their own informed
decisions about extending credit to casino patrons.
Membership in the Omni Network is free to casino operators in the United
States, the Caribbean and South America. The database will initially be
populated by Money Centers of America from its casino cash access operations.
Additional subscribers will contribute their own data to further build out the
credit and transaction history of casino patrons.
5
Business Objectives
Our business strategy is to focus in the following three areas to
maximize growth and return on investment for our business:
1. Technology Development: Develop proprietary technology to manage and execute
the funds transfer transactions that are a part of our core business while
providing us with a competitive advantage in the markets that we serve. This
will enable us to maximize market penetration and realize significant profit
margins.
2. Mergers/Acquisitions: To identify and acquire companies for acquisition that
have a strategic and financial fit to our long-term business model, leverage our
technology, or provide immediate market dominance.
3. Sales: We will continue to successfully and aggressively market our services
in the casino and retail markets.
Technology and Product Development. Due to ownership changes, personnel
changes and antiquated systems, the niche markets in the funds transfer industry
that we have identified have seen a substantial turnover in management,
expertise and industry direction. We believe that these markets are ripe for a
state of the art funds transfer system that will position us as the leader in
the industry.
We have identified the following applications that we believe
create immediate value and will provide us with a competitive advantage in our
core markets.
o Integrated PC based POS transaction management system.
o Web or VPN based credit reporting system specific to
the transactions executed in Money Centers' core markets.
o ONSwitch(TM) and the Omni Network.
o Ticket Redemption Machines (TRM).
o Multi-purpose kiosks.
With few exceptions, our competition is operating on systems that are
outdated with few value-added capabilities. Our development personnel can
develop customized applications that will result in us being more competitive in
the marketplace and experiencing higher profit margins from new accounts.
Mergers/Acquisitions. We believe that we can accelerate penetration
into the markets we serve, while leveraging our management and technology,
through strategic acquisitions. Our primary targets will be those companies
that:
o Produce high margins in a niche segment of the funds transfer
industry;
o Have a sustainable value proposition independent of the
synergies with our company;
o Provide services similar to those that we provide to our
customers;
o Execute similar POS transactions in different market
segments; or
o Utilize third party POS transaction management systems for
their transaction processing.
6
We believe that this strategy will be beneficial to us because:
o Focusing on companies with historically high margins is
consistent with ouR business plan.
o The acquisition of competing companies gives us the ability to
immediately "up sell" our CreditPlus and other products,
resulting in new revenue and greater profits from acquired
accounts.
o We can maximize our return on investment on technology
development strategy by leveraging our technology into new
segments of the funds transfer industry.
o By eliminating the third party POS system and installing our
newly developed system, we can immediately and significantly
increase cash flow while obtaining a critical mass of new
locations.
The Casino Gaming Market
Casino gaming in the United States has expanded significantly in recent
years. Once found only in Nevada and New Jersey, casino gaming has been
legalized in numerous states, including land-based casinos on Indian lands and
elsewhere, on riverboats and dockside casinos, and at horse racing venues. The
growth in gaming has resulted from legalization of gaming in additional
jurisdictions and the opening of new casinos in existing markets, as well as
from an overall increase in gaming activity.
Though the geographic expansion of casino gaming has slowed, we
anticipate continued growth as states struggle to fill large revenue gaps in
their state budgets. We also anticipate continued growth in the Indian Gaming
market as tribes are more successful at negotiating more stable and long-term
compacts with their respective state governments. The expansion of casino gaming
has generated a corresponding demand for ancillary services, including cash
access services in casinos. Third parties provide cash access services to most
casinos pursuant to contracts with the casino operator. We believe that the
principal objective of casino operators in providing or arranging for such
services is to promote gaming activity by making funds available to casino
customers on a convenient basis. In some cases, however, the casino operator may
view such services as a potential profit center separate from the gaming
operations.
Our business currently is concentrated in the casino industry and it
contemplates that its operations will continue to be focused on operations in
casinos and other gaming locations. Accordingly, a decline in the popularity of
gaming, a reduction in the rate of expansion of casino gaming, changes in laws
or regulations affecting casinos and related operations, or other adverse
changes in the gaming industry would have a material adverse effect on our
operations. We will continue our business plan to identify market segments
outside of gaming to diversify our revenue base while maintaining our operating
margins. Until this objective is achieved, there will always be a risk that our
current revenue is highly dependent on the success of the gaming industry.
Increased competition has prompted casino operators to seek innovative
ways to attract patrons and increase the frequency of return visits. We believe
that efficient and confidential access to cash for casino patrons contributes to
increased gaming volume. Credit/debit card cash advances, markers, check cashing
and ATMs are the three primary methods used by casinos to provide their patrons
with quick and efficient access to cash. Virtually all casinos in the United
States currently offer at least one of these services on their premises. While
some casino operators provide such services themselves, most casinos' cash
access services are provided by third parties pursuant to contracts with the
casino operators. We are unique in that we provide multiple options for the
delivery of these services. We offer systems that are run from the casino's
cage, systems that we operate with our employees out of leased space in the
casino, and we offer host programs where our employees facilitate transactions
remotely from the slot machine or gaming table.
Customer Profile
Every gaming facility provides ATM, credit card cash advance, debit,
and/or check cashing services to their customers. Services are typically
outsourced pursuant to an exclusive agreement with a supplier for an average of
two to five years. Each year approximately 400 accounts totaling over $500
million in revenue are up for bid.
Our current customer base consists of a both non-Indian casinos where
we currently provide stand-alone ATM services, and Indian casinos where we have
both stand alone ATM and full service contracts. Of our 27 locations seven (7)
are full service deployments at Indian casinos and the balance are ATM-only
locations (7 casinos and the remainder are retail locations). Our customers
represent a blend of the type and size of gaming operations in the U.S.,
including traditional markets like Las Vegas, Indian reservations, and smaller
markets like Colorado and Missouri.
7
Our full service locations all reside within the Indian Gaming segment
of the industry. Four are in California, with one each in New Mexico, Washington
and Wisconsin. Our stand-alone ATM customers are located in Colorado, Nevada,
New York, and California. Two of our full service customers represented
approximately 44% of our revenue for the year ended December 31, 2005.
There are no boundaries when identifying potential casino customers. In
the near future, we will focus our marketing efforts on Native American Markets,
Las Vegas, Atlantic City, the Caribbean and South America and riverboats.
We operate our cash access services pursuant to agreements with the
operators of the host casinos or approved resellers. Such agreements typically
have initial terms of one to five years, with renewal clauses. In most of the
agreements, either party may cancel the agreement with cause if the breach is
not cured within thirty days. We rely principally on our relationship with the
casino operators rather than on the terms of our contracts for the continued
operation of our cash access services. While there can be no assurance that the
agreements will be renewed after their initial terms, we believe that our
relationships with the casinos in which we operate are good.
Government Regulation
Many states and Tribal entities require companies engaged in the
business of providing cash access services or transmitting funds to obtain
licenses from the appropriate regulating bodies. Certain states require
companies to post bonds or other collateral to secure their obligations to their
customers in those states. State and Tribal agencies have extensive discretion
to deny or revoke licenses. We have obtained the necessary licenses and bonds to
do business with the casinos where we currently operate, and will be subject to
similar licensing requirements as we expand our operations into other
jurisdictions.
As part of our application for licenses and permits, members of our
board of directors, our officers, key employees and stockholders holding five
percent or more of our stock must submit to a personal background check. This
process can be time consuming and intrusive. If an individual is unwilling to
provide this background information or is unsatisfactory to a licensing
authority, we must have a mechanism for making the necessary changes in
management or stock ownership before beginning the application process. While
there can be no assurance that we will be able to do so, we anticipate that we
will be able to obtain and maintain the licenses necessary for the conduct of
our business.
Many suppliers to Native American casinos are subject to the rules and
regulations of the local tribal gaming commission. These gaming commissions have
authority to regulate all aspects of casino operations, including vendor
selection. Some gaming commissions require vendors to obtain licenses and may
exercise extensive discretion to deny or revoke licenses. We have obtained the
necessary licenses or approvals from the appropriate tribal gaming commissions
where we operate. While there can be no assurance that we will be able to do so,
we anticipate that we will be able to obtain and maintain the licenses and
approvals necessary for the conduct of our business.
Our business may also be affected by state and federal regulations
governing the gaming industry in general. Changes in the approach to regulation
of casino gaming could affect the number of new gaming establishments in which
it may provide cash access services.
Competition
We have focused to a large extent on providing cash access services to
the gaming industry. In the cash access services market, we compete primarily
with Global Cash Access, Inc., Certegy, Inc.'s Game Financial Corporation
subsidiary, Global Payments Inc.'s Cash & Win service, Cash Systems, Inc. and
FastFunds Financial Corporation. Competition is based largely on price (i.e.,
fees paid to the casino from cash access service revenues), as well as on
breadth of services provided, quality of service to casino customers and
value-added features such as customer information provided to the casino. It is
possible that new competitors may engage in cash access services, some of which
may have greater financial resources. If we face significant competition, we may
have a material adverse effect on our business, financial condition and results
of operations. We cannot predict whether we will be able to compete successfully
against current and future competitors.
Our competitors are primarily specialized gaming cash access companies.
Global Cash Access and Cash Systems, Inc. are stand alone businesses like us.
Although Global Cash Access has the largest market share, much larger companies
such as Certegy, Global Payments, and US Bank have entered the market through
acquisitions and subsidiary operations. These companies have significant access
to capital and development resources that are superior to ours. However, we
believe that their large size also will make it more difficult for these
companies to adapt quickly to swift changes in market conditions and customized
customer demands.
8
Global Cash Access historically has been the dominant market presence,
with an estimated 66% market share. Certegy was a relatively small player within
the gaming industry until its acquisition of Game Financial Corporation in March
2004. We estimate that Certegy has a 13% market share.
In addition to Global Cash Access and Certegy, we face competition from
Global Payments, Cash Systems, and FastFunds Financial. Global Payments is a
mid-sized merchant processor, with a gaming business called "Cash & Win" that we
estimate has a 7% market share. Global Payments has completed a number of
international acquisitions outside the gaming industry in the past two years
that we believe will garner most of management's focus. Cash Systems, with an
estimated 8% market share, is focused on gaming on Indian Reservations. We
estimate our own market share at 3%. Finally, FastFunds Financial holds an
estimated 2% market share.
We do not view financial institutions that offer ATM services at or
near casinos as effective competitors because they do not have the scope of
products necessary for a full service cash access money center. Local and
national banks can provide ATM services, but they lack credit card, marker, and
check cashing products.
Employees
We currently have 74 full time employees, of which 62 employees are
engaged in operations, four in sales and marketing, two in information
technology and six in finance, administration and management functions.
None of our employees are covered by a collective bargaining agreement,
and we believe that we have a good relationship with our employees.
RISK FACTORS
In addition to other information included in this report, the following
factors should be considered in evaluating our business and future prospects.
Significant expansion of our operations may require additional expenses
and these efforts may strain our management, financial and operational
resources.
If we cannot effectively manage our growth, then our ability to provide
services will suffer. Our reputation and our ability to attract, retain and
serve our customers depend upon the reliable performance of our products and
ATMs, as well as our infrastructure and systems. We anticipate that we will
expand our operations significantly in the near future, and further expansion
will be required to address the anticipated growth in our user base and to
capitalize on market opportunities. To manage the expected growth of our
operations and personnel, we will need to improve our existing systems and
implement new systems, procedures and controls. In addition, we will need to
expand, train and manage an increasing employee base. We will also need to
expand our finance, administrative and operations staff. Though historically we
have managed our growth effectively, we may not be able to effectively manage
our growth in the future. If we are unable to manage growth effectively or if we
experience disruption during our expansion, then our business will suffer and
our financial condition and results of operations will be seriously affected. In
addition, though we are in the process of renewing our existing lines of credit,
we will require additional financing in order to execute our expansion plans.
Additional financing may not be available to us, or if available, then it may
not be available upon terms and conditions acceptable to us. If adequate funds
are not available, then we may be required to delay, reduce or eliminate our
expansion plans.
We have approximately $11,200,000 in indebtedness and approximately
$2,500,000_ in accounts payable, commissions payable and accrued interest and
expenses. If we are unable to satisfy these obligations, then our business will
be adversely effected.
As of December 31, 2005, we had indebtedness in the aggregate principal
amount of approximately $11,200,000 and accounts payable and accrued expenses of
approximately $2,500,000. Though our cash flows are sufficient to meet our
current obligations under our credit facilities, if we become unable to satisfy
these obligations, then our business will be adversely affected. Certain of
these obligations are secured by security interests in substantially all of our
assets granted to the lender. Accordingly, if we are unable to satisfy these
obligations, then our lender may sell our assets to satisfy the amounts due
under these loans. Any such action would have an adverse effect on our business.
9
Our independent auditors have raised substantial doubt about our
ability to continue as a going concern.
Due to our accumulated deficit of $16,477,119 as of December 31, 2005,
and our net loss of $1,665,919 for the year ended December 31, 2005, our
independent auditors have raised substantial doubt about our ability to continue
as a going concern. While we believe that our present plan of operations will be
profitable and will generate positive cash flow, we may not generate net income
or positive cash flow in 2006 or at any time in the future.
We have had a history of losses and may experience continued losses in
the foreseeable future.
For the year ended December 31, 2005 we experienced a net loss of
$1,715,621and for the year ended December 31, 2004, we experienced a net loss of
$11,841,753. Due to the costs associated with our planned continued expansion of
our business, we expect to incur losses for the year ending December 31, 2006.
If we are unable to increase revenues from existing and new contracts while
controlling costs, our losses may be greater than we anticipate and we may have
insufficient capital to meet our obligations.
Our business is concentrated in the gaming industry.
Our business currently is concentrated in the casino gaming industry,
and our plan of operation contemplates that we will continue to focus on
operations in casinos and other gaming locations. Accordingly, a decline in the
popularity of gaming or the rate of expansion of the gaming industry, changes in
laws or regulations affecting casinos and related operations or the occurrence
of other adverse changes in the gaming industry, would have a material adverse
effect on operations.
Most of our agreements with casinos are of a short duration and may not
be renewed.
Our agreements with casino operators typically have initial terms of
one to five years, with renewal clauses. It is likely that one or more of our
casino customers will elect not to renew their contracts. We rely principally on
our relationships with the casino operators, rather than on the terms of our
contracts, for the continued operation of our funds transfer services. However,
if our contracts expire and customers do not elect to renew them, and we have
not entered into sufficient contracts with new customers to replace the lost
revenues, then our revenues will be adversely affected.
Our contracts with Indian tribes are subject to claims of sovereign
immunity.
We have entered into agreements with Indian tribes. Indian tribes in
the United States generally enjoy sovereign immunity from lawsuits, similar to
that of the United States government. The law regarding sovereign immunity is
unsettled. Though some of our contracts provide for a limited waiver of immunity
for the enforcement of our contractual rights, if any Indian tribe defaults on
our agreements and successfully asserts its right of sovereign immunity, our
ability to recover our investment, or to originate and sell future Indian gaming
transactions, could be materially adversely affected.
We derive a significant portion of our revenues from a few customers
and the loss of one or more of these contracts could have a significant adverse
effect on our financial results.
The Company is dependent on two customers for a significant portion of
its revenue and gross profit. For the year ended December 31, 2005, we derived
44% of our revenues from these customers. The loss of either of these customers
would result in an immediate material reduction in our revenues and gross
profit.
We face collection risks in cashing checks presented by casino patrons.
Like all companies engaged in the funds transfer business, we face
certain collection risks, especially with respect to check cashing services. We
attempt to minimize collection risks by utilizing disciplined procedures in
processing transactions. Nevertheless, our operations would be adversely
affected by any material increase in aggregate collection losses. Though we have
been effective in managing our credit risk in the past, it is possible that we
might incur significant losses with respect to our check cashing services in the
future and such losses could have a material, adverse effect on our financial
condition.
10
We are subject to licensing requirements and other regulations.
We are subject to licensing requirements and other regulations in many
states and by Native American tribal entities. Regulators have significant
discretion to deny or revoke licenses. If we are unable to obtain a license
required to do business in a certain state or with a certain Native American
tribe, or if such a license is revoked, there would be significant negative
consequences, including possible similar action by other regulatory entities. In
addition, government laws and regulations may include limitations on fees
charged to consumers for cash access services (although no such limitations
currently exist). Changes in laws and regulations could have a material, adverse
effect on our operations.
The exercise of stock options and warrants at prices below the market
price of our common stock could cause a decrease or create a ceiling on the
market price of our common stock.
We have issued and outstanding stock options and warrants exercisable
for 3,202,500 shares of our common stock at prices below our current market
price, with an average exercise price of $0.01 per share. The existence of these
options may have a depressing effect on the market price of our common stock,
and the exercise of these options, if accompanied by a sale of the shares of
common stock issued on exercise, may result in a decrease in the market price of
our common stock.
Our success depends on market acceptance of our products and services.
We believe that our ability to increase revenues, cash flow and
profitability will depend, in part, upon continued market acceptance of our
products and services, particularly our credit card cash advance products, POS
Debit, CreditPlus, ATM and check cashing products. We cannot predict whether
market acceptance of our existing products and services will continue or that
our new products and services will receive any acceptance from the marketplace.
Changes in market conditions in the gaming industry and in the financial
condition of casino operators, such as consolidation within the industry or
other factors, could limit or decrease market acceptance of our products and
services. Most of our business is based on one to five year agreements with
casino operators. We have been successful in renewing these agreements and in
attracting new customers. However, insufficient market acceptance of our
products and services could have a material, adverse effect on our business,
financial condition and results of operations.
We might expand through acquisitions, which may cause dilution of our
common stock and additional debt and expenses.
Any acquisitions of other companies may result in potentially dilutive
issuances of our equity securities and the incurrence of additional debt. We
plan to seek acquisitions and joint ventures that will complement our services,
broaden our consumer base and improve our operating efficiencies. Acquisitions
involve numerous additional risks, including difficulties in the assimilation of
the operations, services, products and personnel of acquired companies, which
could result in charges to earnings or otherwise adversely affect our operating
results. There can be no assurance that acquisition or joint venture
opportunities will be available, that we will have access to the capital
required to finance potential acquisitions, that we will continue to acquire
businesses or that any acquired businesses will be profitable.
Acquisitions we make may not prove to be profitable, and may drain our
resources.
Although we intend to initiate acquisitions that will provide us with
additional revenues and income, or that involve the acquisition of products or
product lines that are complementary to those we already offer, it is possible
that an acquisition will turn out to have a negative impact on earnings due to
unanticipated costs, disputes resulting in litigation or erosion of the acquired
customer base. In addition, the assimilation of an acquired business will
consume portions of the time, attention and energy of management which otherwise
would be devoted to the day-to-day management of our business.
11
Our success will be largely dependent upon our key executive officers
and other key personnel.
Our success will be largely dependent upon the continued employment of
our key executive officers and, particularly, our continued employment of
Christopher M. Wolfington. The loss of Mr. Wolfington's services would have a
material adverse effect on our operation. Although Mr. Wolfington has entered
into an employment agreement with us, and owns approximately 67.5% of our issued
and outstanding common stock, it is possible that Mr. Wolfington would not
continue his employment with us. In addition, we do not presently maintain
insurance on Mr. Wolfington's life. Although we believe that we would be able to
locate a suitable replacement for Mr. Wolfington if his services were lost, we
may not be able to do so. In addition, our future operating results will
substantially depend upon our ability to attract and retain highly qualified
management, financial, technical and administrative personnel. Competition for
highly talented personnel is intense and can lead to increased compensation
expenses. We may not be able to attract and retain the personnel necessary for
the development of our business.
We will be in competition with companies that are larger, more
established and better capitalized than we are.
The cash access services industry is highly competitive, rapidly
evolving and subject to constant change. Our principal competitors in the
credit/debit card cash advance area are Global Cash Access, LLC, Cash & Win,
Game Financial Corporation, Cash Systems, Inc. and FastFunds Financial Corp.
Some of our competitors have:
o greater financial, technical, personnel, promotional and marketing
resources;
o longer operating histories;
o greater name recognition; and
o larger consumer bases than us.
We believe that existing competitors are likely to continue to expand
their products and service offerings. Moreover, because there are few,
substantial barriers to entry, we expect that new competitors are likely to
enter the cash access services market and attempt to market financial products
and services similar to our products and services, which would result in greater
competition. We may not be able to compete successfully with these new or
existing competitors.
Shares of our common stock lack a significant trading market.
Shares of our common stock are not eligible for trading on any national
or regional exchange. Our common stock is eligible for trading in the
over-the-counter market on the Over-The-Counter Bulletin Board. This market
tends to be highly illiquid. There are currently no plans, proposals,
arrangements or understandings with any person with regard to the development of
a trading market in our common stock. An active trading market in our common
stock may not develop, or if such a market develops, may not be sustained. In
addition, there is a greater chance for market volatility for securities that
trade on the Over-The-Counter Bulletin Board as opposed to securities that trade
on a national exchange or quotation system. This volatility may be caused by a
variety of factors, including the lack of readily available quotations, the
absence of consistent administrative supervision of "bid" and "ask" quotations
and generally lower trading volume.
Ownership of our stock by one person means that our other shareholders
have no effective ability to elect directors or otherwise influence management.
One person controls a majority of our capital stock. Christopher M.
Wolfington owns approximately 67.5% of our issued and outstanding capital stock.
As a result, Mr. Wolfington has the ability to control substantially all matters
submitted to our shareholders for approval (including the election and removal
of directors and any merger, consolidation or sale of all or substantially all
of our assets), to elect himself as Chairman, Chief Executive Officer and
Treasurer and to control our management and affairs. This concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control, or impeding a merger, consolidation, takeover or other business.
12
Our shares of common stock are subject to penny stock regulation.
Holders of shares of our common stock may have difficulty selling those
shares because our common stock will probably be subject to the penny stock
rules. Shares of our common stock are subject to rules adopted by the Securities
and Exchange Commission that regulate broker-dealer practices in connection with
transactions in "penny stocks." Penny stocks are generally equity securities
with a price of less than $5.00 which are not registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that current price
and volume information with respect to transactions in those securities is
provided by the exchange or system. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
those rules, to deliver a standardized risk disclosure document prepared by the
Securities and Exchange Commission, which contains the following:
o a description of the nature and level of risk in the market for
penny stocks in both public offerings and secondary trading;
o a description of the broker's or dealer's duties to the customer
and of the rights and remedies available to the customer
with respect to violation to such duties or other requirements
of securities laws;
o a brief, clear, narrative description of a dealer market,
including "bid" and "ask" prices for penny stocks and the
significance of the spread between the "bid" and "ask" price;
o a toll-free telephone number for inquiries on disciplinary
actions;
o definitions of significant terms in the disclosure document or
in the conduct of trading in penny stocks; and
o such other information and is in such form (including language,
type, size and format), as the Securities and Exchange
Commission shall require by rule or regulation.
Prior to effecting any transaction in penny stock, the broker-dealer
also must provide the customer with the following:
o the bid and offer quotations for the penny stock;
o the compensation of the broker-dealer and its salesperson in the
transaction;
o the number of shares to which such bid and ask prices apply,
or other comparable information relating to the depth and
liquidity of the market for such stock; and
o monthly account statements showing the market value of each
penny stock held in the customer's account.
In addition, the penny stock rules require that, prior to a transaction
in a penny stock not otherwise exempt from those rules, the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written acknowledgment
of the receipt of a risk disclosure statement, a written agreement to
transactions involving penny stocks, and a signed and dated copy of a written
suitability statement. These disclosure requirements may have the effect of
reducing the trading activity in the secondary market for a stock that becomes
subject to the penny stock rules.
A provision in our Amended and Restated Certificate of Incorporation
requires 5% holders of our common stock to consent to background checks by state
and Native American regulators and statutory provisions to which we are subject
may have the effect of deterring potential acquisition proposals.
Many of the regulatory authorities that approve our licensing and many
of the Indian tribes with which we may do business perform background checks on
our directors, officers and principal shareholders. As a consequence, our
Amended and Restated Certificate of Incorporation provides that a person may not
hold 5% or more of our securities without first agreeing to:
o consent to a background investigation,
o provide a financial statement, and
o respond to questions from gaming regulators and/or Indian tribes.
Stockholders holding less than 5% of our outstanding securities could
also be subject to the same requirements. Such requirements could discourage
acquisition of large blocks of our securities, could depress the trading price
of our common stock and could possibly deter any potential purchaser of our
company.
Our directors may be subject to investigation and review by gaming
regulators in jurisdictions where we are licensed or have applied for a license.
Such investigation and review of our directors may have an anti-takeover effect.
13
We do not intend to pay cash dividends on our shares of common stock.
The future payment of dividends will be at the discretion of our Board
of Directors and will depend on our future earnings, financial requirements and
other similarly unpredictable factors. For the foreseeable future, we anticipate
that any earnings that may be generated from our operations will be retained by
us to finance and develop our business and that dividends will not be paid to
stockholders. Accordingly, the only income that our stockholders may receive
will be derived from the growth of our stock price, if any.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters is located at 700 South Henderson Road,
Suite 325, King of Prussia, Pennsylvania 19406 and occupies approximately 1,800
square feet of office space. These offices are located in a building owned by
affiliates of our chief executive officer. Although historically this space was
provided at no cost, we have entered into a lease that will require us to begin
making market rate lease payments for the use of this office space and our
future rent for this office space will be approximately $2,800 per month. We
also have an equipment staging and technology office located in Golden Valley,
Minnesota. The current lease obligation for the Minnesota office is
approximately $738 per month. We believe that our current facilities are
adequate to conduct our business operations for the foreseeable future. If these
premises were no longer available to us, we believe that we could find other
suitable premises without any material adverse impact on our operations.
ITEM 3. LEGAL PROCEEDINGS
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street")
filed a Complaint against iGames Entertainment, Inc. and Money Centers of
America, Inc. ("MCA") (collectively referred to hereinafter as "iGames") in the
United States District Court for the Eastern District of Pennsylvania, alleging
that iGames breached an Asset Purchase Agreement ("APA") that the parties
executed on or about February 14, 2003. The suit also raises claims for
fraudulent misrepresentation and intentional interference with contractual
relations. By virtue of the APA, Lake Street sold to iGames all of Lake Street's
right, title and interest in a casino game called "Table Slots." Lake Street
alleges that it is entitled to additional compensation for the game that exceeds
what was agreed to. This matter is still in the pleadings stage and iGames has
moved to dismiss the plaintiff's claims for fraudulent misrepresentation and
intentional interference with contractual relations, as well as to strike all
claims for punitive damages. We are vigorously defending this action and believe
that Lake Street's claims for additional compensation and damages lack merit.
In addition, we are, from time to time during the normal course of our
business operations, subject to various litigation claims and legal disputes. We
do not believe that the ultimate disposition of any of these matters will have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is currently quoted on the Over-The-Counter Bulletin
Board under the symbol "MCAM.OB."
Market Information
Our shares of common stock were first quoted on the Over-The-Counter
Bulletin Board on October 14, 2002. The following table presents the high and
low bid prices per share of our common stock as quoted for the years ended
December 31, 2005 and December 31, 2004 which information was provided by NASDAQ
Trading and Market Services.
Year ended December 31, 2005
--------------------------------------------------------------------------------
Quarter ended: High Bid Low Bid
----------- ----------
March 31, 2005 1.15 0.51
June 30, 2005 0.55 0.30
September 30, 2005 0.67 0.34
December 31, 2005 0.45 0.25
----------------------------------------------- ----------- ----------
Year ended December 31, 2004
--------------------------------------------------------------------------------
Quarter ended: High Bid Low Bid
----------- ----------
March 31, 2004 1.80 0.56
June 30, 2004 0.75 0.30
September 30, 2004 0.52 0.30
December 31, 2004 0.65 0.26
----------------------------------------------- ----------- ----------
The above quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not reflect actual transactions. On
March 28, 2006, the closing bid price for our common stock was $0.34 per share.
Holders
As of March 28, 2006, we had 57 stockholders of record of our common
stock. Such number of record holders was derived from the records maintained by
our transfer agent, Florida Atlantic Stock Transfer.
Dividends
To date, we have not declared or paid any cash dividends and do not
intend to do so for the foreseeable future. Prior to our acquisition by iGames
in January 2004, we paid dividends to our shareholders. In 2003, these dividends
were approximately $94,900. In January 2004, prior to the acquisition, these
dividends were approximately $270,010. In the future we intend to retain all
earnings, if any, to finance the continued development of our business. Any
future payment of dividends will be determined solely in the discretion of our
Board of Directors.
15
Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------ --------------------- ------------------------ ----------------------------
Number of
securities to be
issued upon
exercise of Weighted average Number of securities
outstanding exercise price of remaining available for
options, warrants outstanding options, future issuance under
and rights warrants and rights equity compensation plans
------------------------------------------ --------------------- ------------------------ ----------------------------
Equity compensation plans approved by 3,602,500 $0.19 0
security holders
------------------------------------------ --------------------- ------------------------ ----------------------------
Equity compensation plans not approved 0 N/A 0
by security holders
------------------------------------------ --------------------- ------------------------ ----------------------------
Total 3,602,500 $0.19 0
------------------------------------------ --------------------- ------------------------ ----------------------------
There were no other securities authorized for issuance under equity
compensation plans at December 31, 2005.
Recent Sales of Unregistered Securities and Use of Proceeds
The following is a summary of transactions during the preceding three
years involving sales of our securities that were not registered under the
Securities Act of 1933. All share figures reflect the 1-for-4 reverse stock
split that occurred on December 11, 2003.
In February 2003, the Company issued 61,250 shares of our common stock
to employees and consultants for services rendered. Accordingly, the Company has
recorded $130,500 , net of deferred compensation of $62,500, in compensation to
reflect the issuance of these shares.
In February 2003, we issued 75,000 shares of our common stock for the
patent right to our Table Slots product. The shares were valued at the
approximate fair market value on the date of the agreement.
In March 2003, we sold 1,030,000 units consisting of one quarter of a
share of our common stock and a warrant to purchase one quarter of a share of
common stock (exercisable at $1.50) for $0.50 per unit to eight accredited
investors. We received proceeds from this stock sale of $448,050, which is net
of offering costs paid of $66,950. Additionally, we issued 1,250 shares of its
common stock as part of the offering costs of this capital raise. None of the
foregoing warrants have been exercised as of the date hereof.
In May 2003, we granted options to purchase 62,500 shares of our common
stock at an exercise price of $2.04 per share to our former chief executive
officer pursuant to the terms of his employment agreement. These options were
issued under our stock option plan in a transaction exempt for the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act.
In June 2003, we sold 500,000 units to a single investor consisting of
one quarter of a share of our common stock and a warrant to purchase one quarter
of a share of common stock (exercisable at $1.00) for $0.50 per unit. We
received proceeds from this stock sale of $235,000, which is net of offering
costs paid of $15,000. None of the foregoing warrants have been exercised as of
the date hereof.
During 2003, the Company issued 80,000 shares of our restricted common
stock to consultants for services rendered. The Company valued these shares at
$1.81 - 2.84 per share the fair market value at the date of the grant and
recorded noncash compensation expense of $174,800.
In July 2003, we issued 62,500 shares of restricted common stock to our
chief executive officer pursuant to the terms of his employment agreement. We
valued these shares at $2.28 per share, the fair market value of our common
stock on the date of grant.
16
In October 2003, we sold 25,000 units consisting of one share of our
common stock and two warrants to purchase a share of our common stock at an
exercise price of $0.60 per share. The purchase price of these units was $.25
per unit and we received gross proceeds from this stock sale of $25,000. The
units, shares of common stock and warrants were sold pursuant to Section 4(2) of
the Securities Act.
In October 2003, we issued 81,750 shares of our common stock to three
consultants for services rendered. We valued the shares at a contemporaneous
sales price on the date of issuance and recorded consulting expense of $147,690
or between $1.80, and $1.88 per share. These shares were issued pursuant to
Section 4(2) of the Securities Act.
In October 2003, pursuant to the terms of an asset purchase agreement,
the Company purchased the Random X 21 product by issuing 75,000 restricted
shares of common stock at the fair market value of $135,000 to the seller as
payment of 50% of the purchase price. This agreement was rescinded after the
merger and the change in our business direction. These shares were issued
pursuant to Section 4(2) of the Securities Act.
Also, in October 2003, we issued 4,542 shares of our common stock to
employees. We valued the shares at a contemporaneous sales price on the date of
issuance and recorded salary expense of $8,175 or $1.80 per share, respectively.
These shares were issued pursuant to Section 4(2) of the Securities Act.
In November 2003, in order to secure the performance of the Company's
obligations under a new line of credit, the Company granted the lender a
continuing lien on and security interest in 250,000 newly issued shares of its
common stock. These shares were issued pursuant to Section 4(2) of the
Securities Act.
Also, in November 2003, we granted options to purchase 62,500 shares of
our common stock at an exercise price of $2.00 per share to its former chief
executive officer pursuant to the terms of his employment agreement. These
shares were issued pursuant to Section 4(2) of the Securities Act.
In December 2003, we issued 25,000 shares of our common stock to a
consultant for services rendered. We valued the shares at the market price on
the date of issuance and recorded consulting expense of $37,000 or $1.48 per
share. These shares were issued pursuant to Section 4(2) of the Securities Act.
Additionally, in December 2003, we issued 5,000 shares of our common
stock to a consultant for services rendered. The Company valued the shares at
the market price on the date of issuance and recorded consulting expense of
$6,600 or $1.32 per share. These shares were issued pursuant to Section 4(2) of
the Securities Act.
On January 2, 2004, we issued 1,351,640 shares of our Series A
Preferred Stock and warrants to purchase 3,800,000 shares of our common stock to
the stockholders and warrant holders of Money Centers of America, Inc. pursuant
to an Agreement and Plan of Merger dated November 26, 2003, in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof and Rule 506 thereunder.
In January 2004, we issued options to purchase 2,635,000 shares of our
common stock to Christopher M. Wolfington and options to purchase an aggregate
of 485,000 shares of our common stock to 16 of our employees and consultants
under our stock option plan. The securities were issued in transactions exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
Additionally, in January 2004, we issued 25,000 shares of our common
stock to a consultant for services rendered. We valued these shares at the
market price on the date of issuance and recorded consulting expense of $30,000
or $1.20 per share. All of these shares were issued pursuant to Section 4(2) of
the Securities Act.
In May 2004, we issued 62,500 shares of restricted common stock to one
of our executive employees, pursuant to the terms of the executive's employment
contract. The company valued those shares at $.70 per share, the fair market
value on the date of the grant.
$2,000,000 of the Available Money purchase price was paid by tender of
an aggregate of 1,470,590 shares of common stock to the previous shareholders of
Available Money in April 2004. The terms of the Stock Purchase Agreement allow
for certain purchase price adjustments. As a result, all of these shares of
common stock were cancelled prior to December 31, 2004.
17
On September 10, 2004, the Company borrowed $210,000 from an affiliate
of our chief executive officer to pay an advance on commissions to a new casino
customer. In connection with this note, the Company issued the lender warrants
to purchase 50,000 shares of our common stock at an exercise price of $.33 per
share. In the event that the principal amount of this loan plus all accrued
interest thereon is paid in full on or before March 1, 2006, then the Company
shall have the right to cancel warrants to purchase 25,000 shares.
In October 2004, the Company granted options to purchase 100,000 shares
of its common stock at an exercise price of $.35 per share to its former
president in connection with the termination of his employment agreement. These
securities were issued pursuant to Section 4(2) of the Securities Act.
In December 2004, the Company granted options to purchase 150,000
shares of its common stock at an exercise price of $.01 per share to the owners
of a software development company as partial consideration for software
development services The company valued these options at $81,000 or $.54 per
share. These shares were issued pursuant to Section 4(2) of the Securities Act.
Pursuant to the Merger Agreement between the company and iGames, the
holders of each share of iGames' common stock received one share of the
company's common stock, and each holder of shares of iGames' Series A
Convertible Preferred Stock received 11.5 shares of the company's common stock.
Options and warrants to purchase iGames' common stock, other than warrants
issued as part of the merger consideration in iGames' acquisition of the company
(the "Merger Warrants"), were deemed options and warrants to purchase the same
number of shares of the company's common stock with no change in exercise price.
The Merger Warrants were canceled in exchange for 1.15 shares of the company's
common stock for each share of common stock purchasable thereunder.
Pursuant to the terms of a common stock offering with registration
rights, the company has accrued penalties in the amount of 70,000 shares. The
company has valued these shares at $45,323.
In January 2005, we sold 984,314 shares of our common stock at $0.51
per share to three investors. These shares were sold pursuant to Rule 506 of
Regulation D.
From September to December 2005 we borrowed $725,000 from seven
individuals, including our Chief Financial Officer ($25,000) and our Chief
Executive Officer's uncle and brother ($250,000 each). These loans bear interest
at 10% per annum with terms of nine months. Warrants to purchase an aggregate of
112,500 shares of our common stock at an exercise price of $0.01 per share were
issued to our Chief Financial Officer (12,500 shares) and four unaffiliated
lenders (100,000 shares).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis of the results of operations,
financial condition and liquidity should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus. These statements have been prepared in accordance with accounting
principles generally accepted in the United States. These principles require us
to make certain estimates, judgments and assumptions that affect the reported
amount of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and related liabilities. On a going forward basis, we evaluate
our estimates based on historical experience and various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
History
We are a single source provider of cash access services, the
ONSwitch(TM) transaction management system and the Omnni Network to the gaming
industry. We combine advanced technology with personalized customer services to
deliver ATM, Credit Card Advance, POS Debit, Check Cashing Services, CreditPlus
outsourced marker services, cash access host program, customer data sharing and
merchant card processing. Our business plan is to identify fragmented segments
of the market to capitalize on merger and acquisition targets of synergistic
companies that support our business model.
We were formed as a Delaware corporation in 1997. Prior to March 2001,
we were a development company focusing on the completion of a Point of Sale
("POS") transaction management system for the gaming industry. In March 2001, we
commenced operations with the launch of the POS system at the Paragon Casino in
Marksville, LA.
18
On January 2, 2004, iGames Entertainment, Inc. acquired us pursuant to
our merger with and into a wholly-owned subsidiary of iGames formed for that
purpose. In addition, on January 6, 2004, iGames acquired Available Money, Inc.,
an operator of free-standing ATM machines in casinos. The business operations of
Available Money were combined with our business operations. As a result of the
acquisition of Available Money and our continued growth, we currently provide
services in 27 locations across the United States.
Our acquisition by iGames was treated as a recapitalization and
accounted for as a reverse acquisition. Although iGames was the legal acquirer
in the merger, we were the accounting acquirer since our shareholders acquired a
majority ownership interest in iGames. Consequently, our historical financial
information is reflected in the financial statements prior to January 2004. All
significant intercompany transactions and balances have been eliminated. We do
not present pro forma information, as the merger was a recapitalization and not
a business combination.
On October 15, 2004, pursuant to an Agreement and Plan of Merger dated
as of August 10, 2004 (the "Merger Agreement") by and between iGames and us,
iGames was merged with and into us. Pursuant to the Merger Agreement, the holder
of each share of iGames' common stock received one share of our common stock,
and each holder of shares of iGames' Series A Convertible Preferred Stock
received 11.5 shares of our common stock. Options and warrants to purchase
iGames' common stock, other than warrants issued as part of the merger
consideration in iGames' January 2004 acquisition of us (the "Merger Warrants"),
are deemed options and warrants to purchase the same number of shares of our
common stock with no change in exercise price. The Merger Warrants were
cancelled in exchange for 1.15 shares of our common stock for each share of
common stock purchasable thereunder.
As a result of this merger, we have retained our December 31 fiscal
year end.
Our business model is to be an innovator and industry leader in cash
access and financial management services for the gaming industry. Within the
funds transfer and processing industries there exists niche markets that are
capable of generating substantial operating margins without the requirement to
process billions of dollars in transactions that is the norm for the industry.
We believe there is significant value to having a proprietary position in each
phase of the transaction process in the niche markets where management has a
proven track record. The gaming industry is an example of such a market and is
currently where we derive the majority of our revenues. We have identified other
markets with similar opportunities, however we have not executed any plans to
exploit these markets at this time.
Current Overview
Our core business of providing single source full service cash access
services in the gaming industry continues to grow and be the major source of our
revenue and profits in 2005. We have also launched several new services in the
last 18 months, such as CreditPlus, our Cash Services Host Program, and our
Transaction Management System that have begun to create new revenue and have
helped to differentiate our product offering in the marketplace.
The acquisition of Available Money in January 2004 continues to provide
challenges for management in terms of the longer than expected conversion of the
processing of the Available Money cash services business over to the systems we
utilize and the renegotiation or termination of nonprofitable contracts. We have
completed our new ATM processing agreement which provides for increased vault
cash availability and lower interest costs, thus lowering our cost of services
and providing additional capacity for our vault cash needs. This will help
facilitate the completion of the Available Money conversion. We have also been
successful in renegotiating several of the Available Money contracts to increase
the fees that we can charge under those contracts, the benefits of which we
started to recognize in September 2005. Certain other contracts that were not
profitable and that we were unable to renegotiate have been or will be
terminated. This will decrease revenue but will have a positive affect on cash
flow and net income. We also recorded a significant purchase price adjustment
relating to Available Money as part of the favorable law suit settlement
relating to lost contracts.
We deployed our ONSwitchTM Transaction Management System ("
ONSwitchTM")January 2006. Though we feel confident that ONSwitchTM will
differentiate us from our competitors and create new sources of revenue for the
company, there is no guarantee that the market will accept this new deployment
strategy. Regardless of the markets acceptance of this new deployment strategy,
ONSwitchTM enables us to gain complete control over our cash access booth
operations and ATMs. ONSwitchTM will "drive" the ATMs and teller applications
and process all transactions through our central system allowing for quicker
customer interactions which translate to greater revenue at less cost from our
current book of business. ONSwitchTM permits us to negotiate network processing
contracts based on sound business decisions versus technology requirements so
that the cost per transaction may be reduced, once again translating to greater
revenue potential from our current book of business. Once all of the properties
have been converted to ONSwitchTM, general operating procedures, field support,
and internal accounting processes will also be streamlined.
19
Our current cost of capital remains high as we have been distracted in
our efforts to recapitalize our balance sheet due to ongoing litigation and our
focused efforts to deploy ONSwitchTM on schedule. Now that both of these
distractions have been removed management considers recapitalization of our
balance sheet a major priority for the remainder of 2006. The success of this
recapitalization will reduce the interest rates we pay on our lines of credit,
which will lower our expenses and contribute to our profitability. Mercantile
Capital has been a strong finance partner to the company, however, the ability
to continue our growth is largely dependent on our ability to identify and
secure capital at reasonable rates.
In April 2006 we were notified that our contract with the Sycuan
casino would not be renewed at its May 2006 expiration. The Company did
not lose this contract based on service or diversity of products. The
Company feels that our competitors have irresponsibly bid for the business.
Management feels our competitor will either lose money or provide poor
customer service and less money to the floor.
This contract represented approximately 27.3% of our gross revenues
and 12.7% of our gross profit for the year ended December 31, 2005. Although
we had hoped to retain this customer, we recognized that our contract might not
be renewed and made cost reduction plans. We anticipate that we will be able to
offset most if not all of the lost cash flow by curtailing of expenses,
deferring certain software development, reduction in nonsales personnel,
repositioning of employees, deferring certain planned investor relations
activities, and a reduction in trade show expenses.
None of the personnel reductions will be in sales. We feel that the
hiring of two new sales people in January 2006 and the increased pipeline of
potential business is critical to the future of the Company. As a result of
these efforts and the extremely positive reception of ONSwitchTM and the Omni
Network, we are confident that we will execute a letter of intent for ONSwitchTM
within the next 3 months. In addition, we believe that we will be able to offset
the loss of the Sycuan contract in the near future with new traditional
contracts.
We seek to avoid litigation and to minimize our exposure to potential
claims arising in the normal course of our business and as a result of our
acquisitions. Despite these efforts, we have been named as a defendant in
several legal proceedings, described in Part II, Item 1, Legal Proceedings,
beginning on page 14 of this report. We are confident that it is in our best
interests to defend these claims and to pursue counterclaims where we believe
that we are likely to obtain a favorable result. We are very pleased to announce
that our two major lawsuits were settled on very favorable terms to the company.
During the nine month period ended September 30, 2005, we have incurred
approximately $625,000 in legal fees related to these legal proceedings.
However, due to our settlement of the two major lawsuits, we do not anticipate
incurring material additional legal fees related to these legal proceedings.
Our core business generates revenues from transaction fees associated
with each unique service we provide, including ATMs, credit card advances, POS
Debit, check cashing, markers and various other financial instruments. We
receive our fees from either the casino operator or the consumer who is
requesting access to their funds. The pricing of each transaction type is
determined by evaluating risk and costs associated with the transaction in
question. Accordingly, our transaction fees have a profit component built into
them. Furthermore, reimbursement for electronic transactions are guaranteed by
the credit or debit networks and associations that process the transactions as
long as procedures are followed, thereby reducing the period of time that trade
accounts receivable are outstanding to several days.
Companies providing cash access services to the gaming industry face
some unique challenges and opportunities in the next ten years. Many companies
in the industry have merged, been acquired or have recapitalized in order to
capitalize on the trends identified in the gaming industry.
Historically, providers of cash access services to the gaming industry
had cash flow margins that were generally higher than those experienced in the
funds transfer and processing industries. Growing competition and the maturing
of the market has resulted in a decline in these margins as companies have begun
marketing their services based on price rather than innovation or value added
services. This trend is highlighted by the number of companies that promote
revenue growth and an increased account base but experience little increase in
net income. This trend is magnified by the fact that the largest participant in
the industry has close to 65% market share and has begun to forgo margin in
order to retain business. Companies that can adapt to the changing market and
can create innovative products and services stand at the forefront of a new wave
in revenue and profit growth.
20
Substantially all gaming facilities provide ATM services, credit card
cash advances, debit, and/or check cashing services to their customers. Services
are typically outsourced and provided on an exclusive basis for an average of
two to five years. Each year, approximately 400 accounts totaling $300 million
in revenue are put out to bid. Currently there are five major companies,
including us, that have proprietary systems to compete for this business.
Although this market has matured from a pricing perspective, the demand for the
services from the end user is still strong.
Like most maturing markets, the companies that succeed are those that
are capable of reinventing themselves and the markets they serve. We believe
that smaller gaming properties will always look to have cash access services
provided in the traditional manner. However, there are several major trends
occurring in the gaming industry that will have a major impact on our industry
and will determine which companies emerge as industry leaders:
1. Consolidation of major casino companies that will put pressure on other
major casino companies to follow suit and will put pressure on smaller
casino companies to focus on service and value added amenities in order
to compete.
The trend towards consolidation of the major gaming companies has
continued and will make it difficult to continue to offer our services in the
traditional manner. The economics are too compelling for the gaming operators
not to consider internalizing these operations in order to generate additional
revenue and profits to service the debt associated with the consolidation. Our
preparation has continued to position us to capitalize on this trend. We have
prepared for this change and have already begun to offer our systems and
services through the issuance of Technology and Use Agreements for our
ONSwitch(TM) transaction management system. Instead of outsourcing the cash
services operations, ONSwitch(TM) offers turn-key processing capabilities for
internal use by the casino. This means casinos will license our technology so
they can operate and maintain their own cash access services, including the
addition of their merchant card processing. Our size makes us uniquely capable
of adapting to this change. Though the license agreements do not have the same
revenue potential as a traditional cash services contract, the net income
derived from these agreements is higher, the user agreements are for a longer
period of time. For instance, the standard outsourced contract is from one to
three years in length, while we will offer ONSwitch(TM) only under five to ten
year licenses. It is in the casino's interest to license ONSwitch(TM) for the
longer period of time as well. Also, we will not have the same capital
expenditures or vault cash requirements that we experience in performing
traditional cash access services. Furthermore, our larger competitors have spent
years trying to conceal the economic benefits of this type of offering because
their large infrastructure is designed to only support an outsourced solution.
2. Ticket In-Ticket Out technology growth exceeding expectations.
The first major casino company to remove coins from the casino floor
was Caesars Palace in Atlantic City, NJ. Since then, slot machine manufacturers
have developed a technology that prints and accepts bar-coded tickets at the
slot machine instead of accepting or dispensing coins. It was originally
anticipated that it would take 10-15 years for the industry to fully adopt this
technology. It appears it may only take half this amount of time. This presents
a problem to casino operators. They now have tens of thousands of bar-coded
tickets a day that need to be redeemed for cash. This has paved the way for
self-service ticket redemption technology so customers do not have to go to the
casino cage in order to redeem their tickets. The initial ticket redemption
machines placed in service have proven to be too big and too expensive. Most
casino operators have to wait until budget season to appropriate the necessary
funds in order to even consider the acquisition of the required equipment. We
believe this functionality will ultimately reside on the ATM machine thus
eliminating the requirement to purchase new equipment and eliminating the need
to remove a slot machine to make room for a stand-alone ticket redemption
device. We are developing technology that will allow ticket-redemption
functionality on our cash access devices. There is still the problem of security
with the bar-coded ticket, which is as good as cash. Many casino operators will
refuse to allow vendors to handle the tickets for security and fraud concerns.
This is an additional economic benefit of our plan to have the casino operator
internalize their cash access services because only the casino's personnel will
handle the tickets in the situations where they are licensing our services.
3. Execution of long-term and stable compacts for Indian Casinos in
numerous state jurisdictions has made traditional capital more readily
available paving the way for a new wave of expansion and the resulting
need for new sources of revenue and customer amenities.
21
Recent shortfalls in state budgets have brought the tribal and state
governments together to execute long-term compacts that meet the financial needs
of both parties. In recent years, California, Arizona, New Mexico and Wisconsin
are just a few examples of this development. The added financial stability for
Indian casinos has made traditional capital more readily available to tribes,
leading many tribes to undertake expansion of casino facilities and operations.
In order to support this expansion, Indian casino operators will seek
new sources of revenues and new amenities to attract and retain more quality
customers. One of the most critical customer amenities in casino operations is
the availability of credit. Traditional gaming markets, such as Las Vegas and
Atlantic City, rely on credit issuance for up to 40% of their revenues. These
markets issue credit internally and rely on specialized credit reporting in
their risk management decisions. Significant capital investment in technology is
required for these transactions to be executed efficiently. However, within the
$15 billion dollar Indian Gaming market there are virtually no credit services
currently available. Approximately 26 of 29 states that have approved Indian
Gaming do not allow the Tribes or their respective casinos to issue credit. The
lack of credit play is also due to the lack of a third party credit issuer that
is capable of facilitating the transactions. Our CreditPlus platform allows
Indian casinos to issue credit to players, providing Indian casinos with a guest
amenity that is already widely accepted in traditional jurisdictions. Our
ability to convert this market opportunity into revenue is largely dependent on
the success of our sales efforts in educating casinos in the Indian Gaming
market regarding the advantages of CreditPlus and its compliance with the
regulatory requirements.
Our Cash Services Host Program is uniquely aimed at capitalizing on the
need for new profitable guest amenities. Where most guest amenities require
additional expenses, this service helps the casino operator generate more
revenues. This service allows customers to facilitate cash access transactions
from the slot machine or gaming table. Our hosts are available to bring the
transaction to the guest, which is viewed as a valuable customer amenity, while
driving more money to the gaming floor for the casino operator.
Organic growth through sales by internal salespeople is usually the
most efficient and profitable growth strategy in the cash services business.
Much of our historical growth has occurred in this manner. We realize that
recognizing industry trends is no assurance of success. We have also
complimented our internal sales strategy by creating relationships with
independent sales organizations that have established relationships with gaming
operators nationwide. Although our sales commissions will be higher at gaming
establishments entered through this sales channel, we will not be burdened with
the up-front salary, travel and entertainment costs associated with the
traditional internal sales approach. We continue to view strategic acquisitions
as part of our business plan to obtain the critical mass we believe is necessary
to compete effectively in our industry.
This parallel strategy of sales, acquisitions and product development
is capital intensive and presents substantial risk. There is no guarantee that
we will be able to manage all three strategies effectively.
We believe that it is necessary to increase our working capital
position so that we can capitalize on the profitable trends in the industry
while maintaining and servicing our current customer base and integrating
acquired operations such as Available Money. Without sufficient working capital,
we would be forced to utilize working capital to support revenue growth at the
expense of executing on our integration and conversion plans. This would result
in substantially higher operating costs without the assurance of additional
revenues to support such costs.
Critical Accounting Policies
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
Revenue Recognition. In general, we record revenue when persuasive evidence
of an arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectability is reasonably assured. The following policies reflect specific
criteria for the various revenues streams of the Company:
22
ATM's and Credit Cards: Fees earned from ATM and credit card advances
are recorded on the date of transaction.
Check Cashing: Revenue is recorded from fees on check
cashing services on the date the check is cashed. If
a customer's check is returned by the bank on which
it is drawn, the full amount of the check is charged
as bad debt loss. The check is subsequently
resubmitted to the bank for payment. If the bank
honors it, the amount of the check is recognized as a
negative bad debt expense.
Check Cashing Bad Debt. The principal source of bad debts that we
experience are due to checks presented by casino patrons that are ultimately
returned by the drawer's bank for insufficient funds. We account for these check
cashing bad debts on a cash basis. Fees charged for check cashing are recorded
as income on the date the check is cashed. If a check is returned by the bank on
which it is drawn, we charge the full amount of the check as a bad debt loss. If
the bank subsequently honors the check, we recognize the amount of the check as
a negative bad debt. Based on the quick turnaround of the check being returned
by the bank on which it is drawn and our resubmission to the bank for payment,
we feel this method approximates the allowance method, which is a Generally
Accepted Accounting Principle.
Goodwill and Long-Lived Intangible Assets. The carrying value of
goodwill as well as other long-lived intangible assets such as contracts with
casinos is reviewed if the facts and circumstances suggest that they may be
impaired. With respect to contract rights in particular, which have defined
terms, this will result in an annual adjustment based on the remaining term of
the contract. If this review indicates that the assets will not be recoverable,
as determined based on our discounted estimated cash flows over the remaining
amortization period, then the carrying values of the assets are reduced to their
estimated fair values. Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill And Other Intangible Assets"
which eliminates amortization of goodwill and certain other intangible assets
and requires annual testing for impairment. The calculation of fair value
includes a number of estimates and assumptions, including projections of future
income and cash flows, determining remaining contract periods and the choice of
an appropriate discount rate. In our experience, forecasts of cash flows based
on historical results are relatively dependable. We use the remaining contract
term for estimating contract periods, which may vary from actual experience due
to early terminations that cannot be forecast. We use our current cost of funds,
which is a variable rate, as the discount rate. Use of a higher discount rate
would have the effect of reducing the calculated fair value, while use of a
lower rate would increase the calculated fair value. In connection with the
acquisition of Available Money (our only acquired reporting unit), goodwill was
allocated based on the excess of the final purchase price over the value of the
acquired contract rights, determined as described above.
Stock Based Compensation. We account for stock based compensation
utilizing Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. We have chosen to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the estimated fair market value of our stock at the date of
the grant over the amount an employee must pay to acquire the stock. We have
adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148
(See New Accounting Pronouncements), which require pro forma disclosures of net
income and earnings per share as if the fair value method of accounting had been
applied.
Change in Fiscal Year End
Following the October 2004 merger of iGames into us, we retained our
prior fiscal year end of December 31. This is a change from iGames' March 31
fiscal year end.
Throughout the following discussion, data for all periods except as of
and for the twelve months ended December 31, 2003, are derived from our audited
consolidated financial statements, which appear in this report. All data as of
and for the twelve months ended December 31, 2003 are derived from our unaudited
consolidated financial statements, which are not presented herein.
23
Results of Operations
Year Ended December 31, 2005 vs. Year Ended December 31, 2004
Year Ended Year Ended
December 31, December 31, Change ($)
2005 ($) 2004 ($)
-------------- -------------- --------------
Net Income (Loss) (1,666,167) (11,841,753) 10,175,586
Revenues 19,409,238 16,252,270 3,156,969
Cost of services 15,801,366 13,912,356 1,889,010
Commissions & Rents Paid 9,790,374 8,719,908 1,070,466
Wages & Benefits 2,284,970 1,993,056 291,914
Processing Fee & Service Charges 1,999,123 1,517,877 481,246
Bad Debts 723,850 572,433 151,417
ATM Lease Fees & Maintenance 489,379 569,486 (80,107)
Cash Replenishment Services 369,909 418,249 (48,340)
Other 143,761 121,347 21,414
Gross Profit 3,607,872 2,339,914 1,267,958
Selling, General and Administrative Expenses 2,238,904 2,642,341 (404,635)
Management Compensation 473,918 622,074 (148,156)
Professional Fees 800,826 1,113,325 (312,499)
Travel 275,583 227,864 47,719
Other 688,576 679,078 9,498
Noncash Compensation 91,225 7,674,491 (7,583,266)
Depreciation and amortization 941,079 1,615,803 (674,724)
Interest expense, net (1,997,438) (1,700,439) 296,999
Other income (expenses) (5,393) (548,593) (543,200)
Our net loss decreased by approximately $10 million during the year
ended December 31, 2005 primarily due to a decrease in noncash compensation of
approximately $7.6 million reflecting one-time charges for noncash compensation
during 2004 (related to the issuance of options to purchase 2,945,000 shares of
our common stock to employees under our stock option plan) that were not
repeated in 2005, an increase in gross profit of approximately $1.3 million due
to our success in lowering various costs of services, and a decrease in
depreciation and amortization of approximately $675,000 due to reduced
amortization of casino contracts reflecting the termination of certain contracts
in 2004. Other expenses decreased due to the fact that there were no impairments
of intangible assets or write-offs of obsolete inventory in 2005 compared to
$418,000 in 2004.
Our revenues increased by approximately 19.4% during the year ended
December 31, 2005 as compared to the year ended December 31, 2004. Approximately
$420,000 of this increase represented increased volume under contracts in place
at the beginning of 2004 and $1,510,000 represented a full year's revenue from
contracts obtained in 2004. $3,225,000 represented revenues from one new
contract in 2005. Approximately $2,000,000 of the increase in revenue was due to
the recognition in our financial statements of gross revenues rather than net
revenues from the Available Money portfolio in 2005 following a change of ATM
processors. Under the previous agreement, our revenues represented the net
amount payable to us from the processor. Under our current agreement, we
recognize all revenues and expenses from the operation of the ATMs, resulting in
an increase in both revenues and cost of services. These increases were offset
by the loss of approximately $3,400,000 in revenues due to cancellations and
non-renewals from our Available Money portfolio and approximately $515,000 in
revenues from the Valley View Casino. Our cost of services increased during the
year ended December 31, 2005 primarily due to an increase in commissions and
rents paid to casinos in the Money Centers portfolio of approximately $2 million
primarily attributable to a new contracts and having a full year of contracts
that came on in the fourth quarter 2004. This was offset by a decrease of
approximately $1 million in commissions and rents paid to the Available Money
portfolio primarily attributable to the intentional loss of non profitable
contracts. In addition, approximately $2,075,000 of various other expenses
increased due to the recognition in our financial statements of all costs of
services from the Available Money portfolio in 2005 following a change in ATM
processors, offset by approximately $1.1 million reduction in cost of services
from the intentional loss of non profitable contracts.
24
Our selling, general and administrative expenses decreased slightly
during the year ended December 31, 2005 primarily due to decreased legal
expenses related to pending litigation and reduced management compensation due
to the amendment of the CEO's employment agreement for 2005. Otherwise the
remaining selling, general and administrative expenses have remained relatively
the same as compared to the year ended December 31, 2004. The Company has
settled our two major lawsuits and has experienced a significant decrease in
legal expenses beginning in the middle of the third quarter of 2005. Our
depreciation and amortization expenses decreased during the year ended December
31, 2005 primarily due to the elimination of amortization that otherwise would
have been realized on contracts that terminated in 2004.
Our interest expense increased $296,299 during the year ended December
31, 2005 mostly due to an increase in the use of capital for our new full
service casinos and increased variable interest rates on our credit facilities
that have increased our cost of capital.
Our other expenses decreased during the year ended December 31, 2005
due to the fact that we had one time write offs in 2004 in the amount of
$548,000 for loss on impairment of intangibles and obsolete inventory.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal year
ended December 31, 2005 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
Changes in Financial Position, Liquidity and Capital Resources
Year ended Year ended
December 31, December 31,
2005 ($) 2004 ($) Change ($)
-------------- -------------- --------------
Net Cash Provided by (Used in) Operating Activities 111,270 (902,217) 1,013,487
Net Cash Used in Investing Activities (683,039) (4,239,374) (3,556,335)
Net Cash Provided by Financing Activities 2,215,944 7,690,312 (5,474,368)
Net cash provided by operations increased by $1,013,487, primarily due
to collections in our accounts receivable and an decrease in net loss.
Cash used in investing activities decreased during the year ended
December 31, 2005 due to the fact that we did not make any acquisitions in 2005
and acquired Available Money in 2004. We have used cash in 2005 to purchase some
of the Available Money ATM's and to complete the ONSwitchTM Transaction
Management System.
Net cash provided by financing activities decreased during the year
ended December 31, 2005 primarily because we had no need for acquisition
financing.
Our available cash equivalent balance at December 31, 2005 was
approximately $2,000,000 and was approximately $154,000 at March 31, 2006.
A significant portion of our existing indebtedness is associated with
our vault cash line of credit of $7,000,000 with Mercantile Capital, L.P., which
we use to provide vault cash for our casino operations. Vault cash is not
working capital but rather the money necessary to fund the float, or money in
transit, that exists when customers utilize our services but we have yet to be
reimbursed from the Debit, Credit Card Cash Advance, or ATM networks for
executing the transactions. Although these funds are generally reimbursed within
24-48 hours, a significant amount of cash is required to fund our operations due
to the magnitude of our transaction volume. Our vault cash loan accrues interest
at the base commercial lending rate of Wilmington Trust Company of Pennsylvania
plus 10.75% per annum on the outstanding principal balance, with a minimum rate
of 15% per annum, and has a maturity date of June 30, 2006. Our obligation to
repay this loan is secured by a first priority lien on all of our assets. The
outstanding balance on our vault cash line of credit fluctuates significantly
from day to day based on activity and collections, especially over weekends.
Vault cash for our ATM operations at locations where we do not provide full cash
access services (primarily Available Money customers) is provided by our ATM
processing provider under the terms of the ATM processing agreement, at a cost
equal to the ATM processor's cost of funds, which currently is the Prime Rate.
25
We incurred $3,850,000 of debt associated with the acquisition of
Available Money. $2,000,000 of this indebtedness was a loan provided by Chex
Services, Inc. As a result of the settlement of our lawsuit with Equitex, Inc.
and Chex Services, Inc. related to our terminated acquisition of Chex Services,
Equitex and Chex Services agreed to cancel our outstanding $2,000,000 principal
liability as well as any liability for accrued but unpaid interest under that
promissory note and we agreed to pay Chex $500,000 within 60 days of July 21,
2005. We paid this amount in September 2005. In part in order to fund the
payment to Chex Services, Inc., in September and October 2005 we borrowed
$725,000 from individuals, including the uncle and the brother of our Chief
Executive Officer and our Chief Financial Officer, pursuant to convertible notes
that bear interest at 10% per annum and mature in June and July of 2006. Each
Note is convertible into shares of our common stock at an exercise price equal
to 85% of the trading price at the time of exercise, with a floor of $.45 per
share.
The remaining $1,850,000 of this indebtedness is part of a $2,050,000
bridge loan provided by Mercantile Capital, L.P. This bridge loan was accruing
interest until June 30, 2005 when it was converted into a 5 year amortizing loan
subject to annual renewal at the lender's discretion. Our obligation to repay
this loan is secured by a first priority lien on all of our assets. We intend to
refinance this obligation in 2006 and are making every effort to do so. We paid
a facility fee of $41,000 in connection with this loan.
On September 10, 2004, we borrowed $210,000 from the father of our
chief executive officer to pay an advance on commissions to a new casino
customer. This loan bears interest at 10% per annum, payable monthly. The
principal amount of this loan is repayable in monthly payments payable on the
1st day of each month commencing with the second month following the month in
which we commence operations at Angel of the Winds Casino, and continuing on the
1st day of each month thereafter, provided that, upon any merger of our company,
sale of substantially all of our assets or change in majority ownership of our
voting capital stock, the lender has the right to accelerate this loan and
demand repayment of all outstanding principal and all unpaid accrued interest
thereon. We currently are making $5,000 principal payments per month. The
current principal balance outstanding is $70,000. In addition, we issued the
lender warrants to purchase 50,000 shares of our common stock at an exercise
price of $.33 per share.
Though we anticipate our operating profits will be sufficient to meet
our current obligations under our credit facilities, if we become unable to
satisfy these obligations, then our business may be adversely affected as
Mercantile Capital will have the right to sell our assets to satisfy any
outstanding indebtedness under our line of credit loan or our term loan that we
are unable to repay.
We also have a substantial amount of accounts payable and accrued
expenses. To the extent that we are unable to satisfy these obligations as they
come due, we risk the loss of services from our vendors and possible lawsuits
seeking collection of amounts due.
In addition, we have an existing obligation to redeem 37,500 shares of
our common stock from an existing stockholder at an aggregate price of $41,250.
This obligation arose in connection with iGames' purchase of certain gaming
software products for 75,000 shares of our common stock. In order to complete
this transaction under these terms, our former management granted this
stockholder the option to have 37,500 shares of his stock redeemed. This
stockholder has elected to exercise this redemption option.
We are also in the process of replacing all of the former Available
Money ATMs with new ATMs that will be processed on more favorable economic
terms. We had originally entered into a capital lease agreement to acquire 71
ATMs and related equipment necessary to complete this conversion. We have
reduced the number of ATM's we will acquire to 33. We have converted
approximately 14 of these ATM's to date. The remaining capital lease agreement
will require us to incur an upfront charge of approximately $105,000 and monthly
rental expense of approximately $4,600 over the remaining 59 months of the lease
term.
Our goal is to change the way our customers view cash access services
by transforming the way casinos find, serve and retain their customers. We will
strive to assist our customers by continuing to grow and improve everything we
do. We require significant capital to meet these objectives. Our capital
requirements are as follows:
o Equipment: Each new account requires hardware at the location level and
some additions to network infrastructure at our central server farm.
o Vault Cash: All contracts in which we provide full service money
centers and ATM accounts for which we are responsible for cash
replenishment require vault cash. Vault cash is the money necessary to
fund the float that exists when we pay money to patrons but have yet to
be reimbursed from the Debit, Credit Card Cash Advance, or ATM networks
for executing the transactions.
26
o Acquisition Financing: We presently have no cash for use in completing
additional acquisitions. To the extent that we cannot complete
acquisitions through the use of our equity securities, we will need to
obtain additional indebtedness or seller financing in order to complete
such acquisitions.
o Working Capital: We will require substantial working capital to pay the
costs associated with our expanding employee base and to service our
growing base of customers.
o Technology Development: We will continue to incur development costs
related to the design and development of our new products and related
technology. We presently do not have an internal staff of engineers or
software development experts and have outsourced this function to
IntuiCode, LLC, a company operated by Jeremy Stein, a member of our
board of directors.
We are actively seeking various sources of growth capital and strategic
partnerships that will assist us in achieving our business objectives. We are
also exploring various potential financing options and other sources of working
capital. There is no assurance that we will succeed in finding additional
sources of capital on favorable terms or at all. To the extent that we cannot
find additional sources of capital, we may be delayed in fully implementing our
business plan.
We do not pay and do not intend to pay dividends on our common stock.
We believe it to be in the best interest of our stockholders to invest all
available cash in the expansion of our business.
Due to our accumulated deficit of $16,477,197 as of December 31, 2005
and our net losses and cash provided by operations of $1,665,919 and $111,270,
respectively, for the year ended December 31, 2005, our independent auditors
have raised substantial doubt about our ability to continue as a going concern.
While we believe that our present plan of operations will be profitable and will
generate positive cash flow, there is no assurance that we will generate net
income or positive cash flow for 2006 or at any time in the future.
ITEM 7. FINANCIAL STATEMENTS
Our consolidated financial statements for Fiscal Years 2005 and 2004
and footnotes related thereto may be found at pages F-1 through F-35.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2005, we carried out an evaluation of the
effectiveness of the design and operation of our "disclosure controls and
procedures" (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) under
the supervision and with the participation of our management, including
Christopher M. Wolfington, our Chief Executive Officer and Chief Financial
Officer. Based upon that evaluation, Mr. Wolfington concluded that our
disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management to allow timely decisions
regarding required disclosure.
27
Changes in Internal Controls
There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the date we carried out this evaluation.
ITEM 8B. OTHER INFORMATION
None.
28
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16 (a) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions of our
directors and executive officers and executive officers of our subsidiary as of
March 31, 2006.
Name Age Current Position(s) with Company
-------------------------- -------- -------------------------------------------
Christopher M. Wolfington 40 Chairman of the Board of Directors, Chief
Executive Officer and President
Jason P. Walsh 28 Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer
Jeremy Stein 38 Director
Barry R. Bekkedam 39 Director
Wayne A. DiMarco 40 Director
Jonathan P. Robinson 41 Director
All directors serve until their successors are duly elected and
qualified. Vacancies in the Board of Directors are filled by majority vote of
the remaining directors. The executive officers are elected by, and serve at the
discretion of, the Board of Directors.
A brief description of the business experience during the past five
years of our directors, our executive officers and our key employees is as
follows:
Christopher M. Wolfington - Chairman, Chief Executive Officer and
President. Mr. Wolfington has been in the financial services industry for
approximately 16 years. He has been the Chairman of Money Centers since its
inception. From 1991 to 1994 he was a partner in The Stanley Laman Group, a firm
providing investment, insurance, mergers, acquisition, and planning services to
companies nationwide. From 1995 to 1998 he was President of Casino Money
Centers, a subsidiary of CRW Financial, Inc. Mr. Wolfington received a Bachelor
of Arts degree in Communications and Business from the University of Scranton.
Jason P. Walsh - Vice President-Finance, Chief Financial Officer,
Secretary and Treasurer. Mr. Walsh became our Chief Financial Officer,
Secretary and Treasurer in June 2005. From 1997 until June 2005 he was a
certified public accountant with Robert J. Kratz & Company. Mr. Walsh received a
Bachelors of Science degree in Accounting from Drexel University, and is a
Pennsylvania Certified Public Accountant.
Jeremy Stein - Mr. Stein served as President and Chief Executive
Officer and a director of iGames from June 2002 until January 2004, and as
Secretary and a director of iGames since January 2004. Mr. Stein has also
served as the Chief Executive Officer of IntuiCode, LLC, a software development
company, since 2000 and as a senior software engineer with Mikohn Gaming
Corporation, where he worked until 2001. Prior thereto, he was a senior
software engineer and director of Progressive Games, Inc. from 1995 to 1998 and
the Chief Technical Officer of Emerald System, Inc. from 1993 to 1995.
Mr. Stein studied computer science at Virginia Tech. See "Related Party
Transactions."
Barry Bekkedam - Director. Mr. Bekkedam served as a member of iGames'
board of directors from January 2004 through October 2004 and as a member of our
board of directors since October 2004. Mr. Bekkedam is the chairman of the
board of directors and chief executive officer of Ballamor Capital Management,
Inc., an investment advisory firm located in Wayne, Pennsylvania that he founded
in 1997. Ballamor Capital Management, Inc. is an objective investment advisory
firm that provides consultative services to families and individuals of wealth.
Mr. Bekkedam received a Bachelors of Science in Accounting from the College of
Commerce and Finance at Villanova University.
29
Wayne DiMarco - Director. Mr. DiMarco served as a member of iGames'
board of directors from January 2004 through October 2004 and as a member of our
board of directors since October 2004. Mr. DiMarco is the president of
P. DiMarco & Co., Inc., a privately owned highway and heavy construction site
development company based in King of Prussia, Pennsylvania. Mr. DiMarco
received a Bachelors of Science in Civil Engineering from Lehigh University.
Jonathan P. Robinson - Director. Mr. Robinson has served as a member
of our board of directors since January 2005. Mr.Robinson has been Chief
Financial Officer of O'Neill Properties Group, a Mid-Atlantic real estate
development company, since 2002. He was Chief Financial Officer of Airclick,
Inc. from 2000 to 2002. Prior thereto, Mr. Robinson was Chief Financial Officer
of Safeguard International, a $300 million cross-Atlantic private equity fund,
focused on later-stage leveraged buyouts and private equity investments, from
1999 to 2000. From 1993 to 1998, Mr. Robinson was Chief Financial Officer of
CRW Financial, Inc. Mr. Robinson received a B.S. degree from Bloomsburg
University in 1986.
There are no family relationships among any of our directors or
executive officers.
Audit Committee
The Audit Committee oversees our processes of accounting and financial
reporting and provides oversight with respect to our audits and financial
statements. In this role, the Audit Committee reviews the professional services
provided by our independent accountants and the independence of the accounting
firm from our management. The Audit Committee also reviews the scope of the
audit performed by our independent accountants, our annual financial statements,
our systems of internal accounting controls and other matters with respect to
the accounting, internal auditing and financial reporting practices and
procedures as it finds appropriate or as may be brought to its attention. The
Audit Committee is comprised of Messrs. Bekkedam, DiMarco and Robinson, each of
whom is independent as defined by the requirements of The NASDAQ Stock Market
and the rules and regulations of the Securities and Exchange Commission. Mr.
Robinson serves as Chairman of the Audit Committee and as our "audit committee
financial expert" as required under the SEC's rules. The Audit Committee did not
have a formal meeting in fiscal 2005.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act requires our directors,
executive officers and persons who are the beneficial owners of more than ten
percent of our common stock (collectively, the "Reporting Persons") to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and to furnish us with copies of these reports.
Based on our review of Forms 3 and 4 filed with the Securities and
Exchange Commission, we do not believe that any of the Reporting Persons had
delinquent filings pursuant to Section 16(a) of the Securities Exchange Act.
Code of Ethics
We have adopted a code of ethics that applies to our executive
officers, all other employees and each member of our Board of Directors. Our
Board of Directors adopted the code of ethics in June 2004. We will provide a
copy of the code of ethics to any person without charge, upon request. The
request should be made in writing and addressed to Christopher M. Wolfington,
Money Centers of America, Inc., 700 South Henderson Road, Suite 325, King of
Prussia, Pennsylvania 19406. The code of ethics is also posted on our website at
www.moneycenters.com. We intend to disclose any amendments or waivers to our
code of ethics on our website. Additionally, our code of ethics is included as
an exhibit to this Annual Report on Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation paid or accrued during the
years ended December 31, 2005 and 2004 to our Chief Executive Officer and the
most highly compensated executive officers whose total annual salary and bonus
exceeded $100,000 during such fiscal year (collectively, the "Named
Executives").
30
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------ ----------------
Fiscal Number of
Year Ended Other Annual Shares or All Other
Name and Principal Position 12/31 Salary Bonus Compensation Options Compensation
---------------------------- ------------ ----------- ----------- ------------- ------------ ----------------
Christopher M. Wolfington, 2005 $350,000 (2) $ 83,371 (6) $0 0 $54,180 (7)
Chairman, Chief Executive
Officer, President (1)
2004 $350,000 (2) $431,995 (3) $0 2,635,000 (4) $47,628 (5)
T. Scott Kruse, Director of 2005 $118,000 $ 0 $0 25,000 $ 0
Business Management
(1) Mr. Wolfington was appointed our President and Chief Executive Officer on
January 2, 2004, effective upon the consummation of our acquisition of
Money Centers of America, Inc.
(2) Pursuant to his employment agreement, Mr. Wolfington began receiving an
annual salary of $350,000 on January 2, 2004.
(3) This consists of Mr. Wolfington's signing bonus of $200,000 and annual
bonus of $175,000 for the year ended December 31, 2004. These bonuses
were not paid as of December 31, 2004. They were added to the officer
payable on January 1, 2005. Also includes $56,995 in sales commissions.
(4) Pursuant to his employment agreement Mr. Wolfington received options to
purchase 2,635,000 shares of our Common Stock.
(5) Includes life insurance premiums and automobile expenses.
(6) The executives employment agreement was amended to state that the
guaranteed bonus for 2005 was only 12.5% of salary or $43,750. This
amount also includes sales commissions in the amount of $39,621.
(7) Includes life insurance premiums and automobile expenses.
Option Grants For the Year Ended December 31, 2005.
---------------------------------------------------
The following table sets forth information concerning year-end option values for
2005 for the executive officers named in our Summary Compensation Table above.
The value of unexercised in-the-money options is calculated based on the closing
bid price of our common stock on December 31, 2005 of $.37.
Fiscal Year End Option Values
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
-----------------------------------------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
-------------------------------- -------------- --------------- ------------- ----------------
Christopher M. Wolfington 2,635,000(1) 0 948,600(3) $0
T. Scott Kruse 125,000(2) 0 36,000(3) $0
31
(1) Consists of options to purchase 2,635,000 shares of our common stock at an
exercise price of $.01 per share.
(2) Consists of options to purchase 100,000 shares of our common stock at an
exercise price of $.01 per share and options to purchase 25,000 shares of
our common stock at an exercise price of $0.33 per share.
(3) Based on a closing sales price of $.37 per share on December 31, 2005.
Long Term Incentive Plans
We currently do not have any long-term incentive plans.
Compensation of Directors
Our directors who are also employees do not receive any additional
consideration for serving on our board of directors. Our outside directors, who
are not employees, receive $2,500 for each meeting of the board of directors or
any committee thereof that they attend. In addition, our outside directors
receive an initial grant of 25,000 shares of restricted stock that vest in
accordance with a schedule determined by our chief executive officer and annual
grants of options to purchase 25,000 shares of our common stock at an exercise
price equal to the closing sales price of our common stock on the date of grant.
.. The company has issued these grants and options in 2005 for 2004.
Employment Agreements
In January 2004, we entered into a five-year employment agreement with
Christopher M. Wolfington, our Chairman, President and Chief Executive Officer.
In addition to an annual salary of $350,000 per year (subject to annual
increases at the discretion of the Board of Directors) (the "Base Salary"), Mr.
Wolfington's employment agreement provides for a $200,000 signing bonus, a
guaranteed bonus equal to 50% of his Base Salary in any calendar year (the
"Guaranteed Bonus") and a discretionary incentive bonus of up to 50% of his Base
Salary in any calendar year pursuant to a bonus program to be adopted by the
Board of Directors (the "Incentive Bonus"). Pursuant to his employment
agreement, Mr. Wolfington is entitled to fringe benefits including participation
in retirement plans, life insurance, hospitalization, major medical, paid
vacation, a leased automobile and expense reimbursement. In addition, Mr.
Wolfington received options to purchase 760,000 shares of our common stock at an
exercise price of $.01, which are immediately vested and options to purchase
1,875,000 shares our common stock at an exercise price of $.01, which have
vested due to the issuance of a commitment letter by Mercantile Capital, L.P. to
refinance our vault cash and working capital financing. In the event there is a
change of control after which Mr. Wolfington is asked to relocate his principal
business location more than 35 miles, his duties are significantly reduced from
the duties he had immediately prior to the change of control or there is a
material reduction in his Base Salary in effect immediately prior to the change
of control and, as a result of any of the foregoing, Mr. Wolfington resigns his
employment hereunder within one year after the date of the change of control,
then Mr. Wolfington shall be entitled to receive as severance payments, his
Guaranteed Bonus, his Base Salary and his insurance benefits for a period equal
to the greater of the initial term of the agreement or 24 months from the date
of the termination or cessation of Mr. Wolfington's employment. For purposes of
Mr. Wolfington's employment agreement, a change of control occurs if we sell all
or substantially all of our assets or if shares of our capital stock
representing more than 50% of the votes which all stockholders are entitled to
cast are acquired, by purchase, merger, reorganization or otherwise) by any
person or group of affiliated persons not an affiliate of iGames at the time of
such acquisition. Effective March, 2006 the Company amended the executives
agreement to reduce his guaranteed bonus for 2005 from 50% of his salary to
12.5% of his salary.
In June 2005 we entered into an employment agreement with Jason P.
Walsh, our Vice-President-Finance, Chief Financial Officer, Secretary and
Treasurer. The term of the agreement expires December 31, 2006, with automatic
annual renewals thereafter unless either party gives notice of non-renewal at
least thirty days prior to automatic renewal. Mr. Walsh's minimum annual salary
is $120,000. In addition, Mr. Walsh was granted options to purchase 200,000
shares of the Company's common stock with an exercise price of $.42 per share,
of which 50,000 vested immediately, 50,000 vest in one year and the remainder
vest in two years. Mr. Walsh will receive annual bonus compensation of up to
$50,000 per year based upon the Company's achievement of specified growth and
performance milestones. In the event Mr. Walsh's employment is terminated prior
to the then-current expiration date by the Company without good cause, as
defined in the employment agreement, or Mr. Walsh elects early termination with
good reason, as defined in the employment agreement, Mr. Walsh will receive 100%
of his annual salary in effect as of the date of such termination for a period
of (i) the greater of four months or through the end of the initial year of the
term of the Employment Agreement; or (ii) the greater of six months or through
the end of the initial year of the term of the Employment Agreement if such
termination occurs within twelve months following a change in control, as
defined in the employment agreement. In addition, Mr. Walsh would be entitled to
payment of accrued but unused vacation time through the termination date and a
fraction of any performance bonus otherwise payable to him, and all unvested
stock options held by Mr. Walsh would automatically vest. On October 20, 2005,
Mr. Walsh's employment agreement was amended to increase his annual salary to
$145,000 and decrease his maximum annual bonus compensation to $25,000.
32
Repricing of Options
We have not adjusted or amended the exercise price of any stock
options.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information as to ownership of Common Stock by Officers, Directors and owners of
5% or more of our Common Stock
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of December 31, 2005 by:
o each person known to us to be the beneficial owner of more than 5% of our
common stock;
o each of our directors;
o each of our executive officers; and
o all of our executive officers and directors as a group.
Unless otherwise specified, we believe that all persons listed in the table
possess sole voting and investment power with respect to all shares of our
common stock beneficially owned by them. As of March 28, 2006, 25,291,136 shares
of our common stock were issued and outstanding.
Amount and Nature of
Name of Beneficial Owner (1) Position Beneficial Ownership (1) Percentage of Class
----------------------------- -------------------- ---------------------------- ---------------------
Christopher M. Wolfington President, Chief 20,319,412(2) 72.8%
700 South Henderson Road, Executive Officer,
Ste. 325 Chairman of the
King of Prussia, PA 19406 Board
Jason P. Walsh Chief Financial 82,500(3) 0.8%
700 South Henderson Road Officer, Secretary
Ste. 325 & Treasurer
King of Prussia, PA 19406
Jeremy Stein Director 372,500(4) .24%
301 Yamato Road, Suite 2199
Boca Raton, FL 33431
Wayne DiMarco Director 95,000(5) .10%
131 East Church Road
King of Prussia, PA 19406
Barry Bekkedam Director 98,000(6) .19%
1200 Liberty Ridge Drive
Suite 340
Wayne, PA 19087
Jonathan Robinson Director 75,000(7) .10%
700 S. Henderson Road
King of Prussia, PA 19406
All Executive Officers and
Directors as a group (4 persons) ___________________ 21,034,362 73.9%
* Less than 1%
33
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. All shares are beneficially
owned and sole voting and investment power is held by the persons named,
except as otherwise noted.
(2) Includes currently exercisable options to purchase 2,635,000 shares of
Common Stock, and 3,108,772 shares of Common Stock owned by the
Christopher M. Wolfington Grantor Retained Annuity Trust. Does not
include 621,759 shares of Common Stock held by the Christopher M.
Wolfington Irrevocable Trust as Mr. Wolfington is not the beneficial
owner of these shares of Common Stock.
(3) Includes currently exercisable options to purchase 50,000 shares of
common stock and warrants to purchase 12,500 shares of common stock.
(4) Includes currently exercisable options to purchase 312,500 shares of
Common Stock.
(5) Includes currently exercisable options to purchase 70,000 shares of
Common Stock.
(6) Includes currently exercisable options to purchase 50,000 shares of
Common Stock.
(7) Includes currently exercisable options to purchase 50,000 shares of
Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On September 1, 2004, we engaged IntuiCode, LLC to provide product
development services to us under a one-year agreement calling for aggregate
payments to IntuiCode of $35,000 per month, or $420,000 in the aggregate, and
options to purchase 150,000 shares of our common stock. We paid IntuiCode
approximately $175,000 during the year ended December 31, 2004, and
approximately $300,000 during the nine months ended September 30, 2005. In
October 2005, we entered into a Technology Support Agreement with IntuiCode for
ongoing product development and support services for the period from September
1, 2005 through December 31, 2005 for consideration of $15,000 per month plus
the issuance of warrants for each such month to purchase 15,000 shares of our
common stock at then-current market prices. Commencing January 1, 2006,
IntuiCode is providing services on a monthly basis for cash compensation
determined on a project-by-project basis. We acquired the rights to the
Protector(TM) from IntuiCode, and paid aggregate royalties to IntuiCode of
approximately $88,374 for the year December 31, 2003 and did not pay royalties
in the year ended December 31, 2004. We relinquished our rights to the
Protector(TM) in early 2004 as the company changed its business strategy after
the purchase of Money Centers and Available Money. Jeremy Stein, a member of our
board of directors, holds approximately 1.5% of our stock (including shares
subject to currently-exercisable options) is also the Chief Executive Officer
and the holder of approximately 43% of the outstanding membership interests of
IntuiCode. We believe the terms of IntuiCode's engagement are at least as fair
as those that we could have obtained from unrelated third parties in arms-length
negotiations. In addition, during the year ended December 31, 2004, we extended
short-term loans in the aggregate principal amount of $63,000 to IntuiCode.
These loans have been repaid.
Although we believe that IntuiCode is highly qualified to provide these
services, we believe that other software developers are available to provide
similar services should IntuiCode no longer be able or willing to do so.
On September 10, 2004, we borrowed $210,000 from the father of our
chief executive officer to pay an advance on commissions to a new casino
customer. This loan bears interest at 10% per annum, which is payable monthly
beginning October 1, 2004. The principal amount of this loan is repayable in
monthly payments payable on the 1st day of each month commencing with the second
month following the month in which we commence operations at Angel of the Winds
Casino, and continuing on the 1st day of each month thereafter through April 30,
2005, provided that, upon any merger of our company, sale of substantially all
of our assets or change in majority ownership of our voting capital stock, the
lender has the right to accelerate this loan and demand repayment of all
outstanding principal and all unpaid accrued interest thereon. The amount of the
principal payment due in any month is equal to the amount of lease fee advances
that we receive from this casino customer during that month. In addition, we
issued the lender warrants to purchase 50,000 shares of our common stock at an
exercise price of $.33 per share. In the event that the principal amount of this
loan plus all accrued interest thereon is paid in full on or before March 1,
2006, then we shall have the right to cancel warrants to purchase 25,000 shares.
34
In October 2004, we issued options to purchase 100,000 shares of common
stock at an exercise price of $0.35 per share to Jeremy Stein in full settlement
of all obligations under his employment agreement.
In December 2004, we issued options to purchase an aggregate of 150,000
shares of common stock at an exercise price of $0.01 per share to two
consultants at IntuiCode. Jeremy Stein received 60,000 of these options.
From September to December 2005 we borrowed $725,000 from seven
individuals, including our Chief Financial Officer ($25,000) and our Chief
Executive Officer's uncle and brother ($250,000 each). These loans bear interest
at 10% per annum with terms of nine months. Warrants to purchase an aggregate of
112,500 shares of our common stock at an exercise price of $0.01 per share were
issued to our Chief Financial Officer (12,500 shares) and four unaffiliated
lenders (100,000 shares).
ITEM 13. EXHIBITS
Exhibit Number Description
---------------- -------------
3.1 Money Centers of America, Inc. Amended and Restated
Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 of the Current Report on Form 8-K filed on
October 19, 2004).
3.2 Money Centers of America, Inc. Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.2 of the Current
Report on Form 8-K filed on October 19, 2004).
4.1 Form of Specimen Stock Certificate.
10.1 Amended and Restated 2003 Stock Incentive Plan (incorporated
by reference to Exhibit 10.2 of Form 10-KSB filed on July 13,
2004)
10.2 Employment Agreement dated as of January 2, 2004 by and
between iGames Entertainment, Inc. and Christopher M.
Wolfington (incorporated by reference to Exhibit 10.1 of Form
10-KSB filed on July 13, 2004).
10.3 Employment Agreement dated as of June 14, 2005 by and between
Money Centers of America, Inc. and Jason P. Walsh
(incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed on June 17, 2005).
10.4 Amendment to Employment Agreement dated as of October 20,
2005 by and between Money Centers of America, Inc. and Jason
P. Walsh.
10.5 Loan and Security Agreement by and between iGames
Entertainment, Inc. and Mercantile Capital, L.P. dated
November 26, 2003 (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-QSB for the fiscal
quarter ended December 31, 2003 filed on February 17, 2004).
10.6 Demand Note payable to the order of Mercantile Capital, L.P.
in the principal amount of $250,000 dated November 26, 2003
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-QSB for the fiscal quarter ended December
31, 2003 filed on February 17, 2004).
10.7 Amended and Restated Agreement and Plan of Merger By and
Among Money Centers of America, Inc., Christopher M.
Wolfington, iGames Entertainment, Inc., Michele Friedman,
Jeremy Stein and Money Centers Acquisition, Inc., dated as of
December 23, 2003 (incorporated by reference to Exhibit 2.1
of Current Report on Form 8-K filed on January 20, 2004).
10.8 Stock Purchase Agreement For the Acquisition of Available
Money, Inc. By iGames Entertainment, Inc., from Helene Regen
and Samuel Freshman dated January 6, 2004 (incorporated by
reference to Exhibit 1.1 of Current Report on Form 8-K filed
on January 21, 2004).
35
Exhibit Number Description
---------------- -------------
10.9 Software Development Agreement effective September 1, 2004 by
and between Money Centers of America, Inc. and Intuicode LLC.
(Incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form SB-2 filed on February 14,
2004 (File No. 333-122819)
10.10 Settlement Agreement dated April 21, 2005 by and between
Money Centers of America, Inc. and the former shareholders
of Available Money and related parties.
10.11 Settlement Agreement and Mutual Release with Chex Services,
Inc., dated July 21, 2005.
14 Code of Ethics (incorporated by reference to Exhibit 14 of
Form 10-KSB filed on July 13, 2004)
21 Subsidiaries of Money Centers of America, Inc.
31.1 Certification dated April 14, 2006 pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a) of the Principal Executive
Officer and the Principal Financial Officer as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by
Christopher M. Wolfington, Chief Executive Officer and Chief
Financial Officer.
31.2 Certification dated April 14, 2006 pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a) of the Principal Accounting
Officer as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Jason P. Walsh, Chief Financial
Officer.
32 Certification dated April 14, 2006 pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 made by Christopher M. Wolfington,
Chief Executive Officer and Jason P. Walsh, Chief Financial
Officer.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
During 2005, the aggregate fees billed for professional services
rendered by our principal accountant for the audit of our annual financial
statements and review of our quarterly financial statements was $53,000. During
2004, the aggregate fees billed for professional services rendered by our
principal accountant for the audit of our annual financial statements and review
of our quarterly financial statements was $86,500.
Audit-Related Fees
During 2005, our principal accountant did not render assurance and
related services reasonably related to the performance of the audit or review of
financial statements. During 2004, our principal accountant did not render
assurance and related services resonably related to the performance of the audit
or review of financial statements.
Tax Fees
During 2005, the aggregate fees billed for professional services
rendered by our principal accountant for tax compliance, tax advice and tax
planning was zero. During 2005, the aggregate fees billed for professional
services rendered by our principal accountant for tax compliance, tax advice and
tax planning were $11,000. These services consisted of preparation of corporate
tax returns and state and federal tax planning.
All Other Fees
During 2005, there were no fees billed for products and services
provided by the principal accountant other than those set forth above. During
2005, there were no fees billed for products and services provided by the
principal accountant other than those set forth above.
Audit Committee Approval
The Audit Committee pre-approves all audit and non-audit services
provided by our independent auditors prior to the engagement of the independent
auditors with respect to such services. The Audit Committee shall pre-approve
any additional audit services and permissible non-audit services. All "Audit
Fees" and "Tax Fees" set forth above were pre-approved by the Audit Committee in
accordance with its pre-approval policy.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Annual Report on Form 10-KSB to be
signed on its behalf by the undersigned thereunto duly authorized, in the City
of Philadelphia, Commonwealth of Pennsylvania.
Date: April 14, 2006 Money Centers of America, Inc.
By: /s/ Christopher M. Wolfington
--------------------------------
Christopher M. Wolfington
Chief Executive Officer
In accordance with the Exchange Act, this report had been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
/s/ Christopher M. Wolfington
------------------------------------
Christopher M. Wolfington
Chief Executive Officer and Director
Date: April 14, 2006
/s/ Jason P. Walsh
------------------------------------
Jason P. Walsh
Chief Financial Officer (principal financial officer and
Principal accounting officer)
Date: April 14, 2006
/s/ Jeremy Stein
------------------------------------
Jeremy Stein
Director
Date: April 14, 2006
/s/ Barry Bekkedam
------------------------------------
Barry Bekkedam
Director
Date: April 14, 2006
/s/ Wayne DiMarco
------------------------------------
Wayne DiMarco
Director
Date: April 14, 2006
/s/ Jonathan P. Robinson
------------------------------------
Jonathan P. Robinson
Director
Date: April 14, 2006
FINANCIAL STATEMENTS
Index to Financial Statements
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in Stockholders' Deficit F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Money Centers of America, Inc.
We have audited the accompanying consolidated balance sheet of Money Centers of
America, Inc. and Subsidiary as of December 31, 2005 and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the years ended December 31, 2005 and 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Money Centers of
America, Inc. and Subsidiary as of December 31, 2005 and the results of their
operations and their cash flows for the years ended December 31, 2005 and 2004,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the financial statements, the Company has suffered recurring losses from
operations, has net cash used in operations, a net working capital deficit, a
stockholders' deficit and an accumulated deficit that raises substantial doubt
about its ability to continue as a going concern. Management's plan in regard to
these matters is also described in Note 14. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Sherb & Co, LLP
Certified Public Accountants
Boca Raton, Florida
April 13, 2006
F-1
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
Current assets:
Cash and cash equivalents $ 1,987,401
Restricted cash 4,277,447
Accounts receivable 342,742
Prepaid expenses and other current assets 241,264
-------------
Total current assets 6,848,854
Property and equipment, net 643,195
Other assets
Intangible assets, net 945,007
Goodwill 203,124
Deferred financing costs 65,348
Deposits 180,897
-------------
Total other assets 1,394,376
-------------
$ 8,886,425
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,019,193
Accrued interest 116,961
Accrued expenses 229,351
Current portion of capital lease 105,825
Notes payable, net of debt discount 240,069
Notes payable - related parties,net of debt discount 587,403
Lines of credit 10,000,424
Due to officer 326,580
Commissions payable 1,119,476
-------------
Total current liabilities 13,745,282
Long-term liabilities:
Capital lease, net of current portion 176,730
-------------
Total long-term liabilities 176,730
Stockholders' Deficit:
Preferred stock; $.001 par value, 20,000,000
shares authorized
0 shares issued and outstanding -
Common stock; $.01 par value, 150,000,000
shares authorized
25,206,978 shares issued and outstanding 252,069
Additional paid-in capital 11,189,541
Accumulated deficit (16,477,197)
-------------
Total stockholders' deficit (5,035,587)
-------------
$ 8,886,425
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
DECEMBER 31,
--------------------------------------
2005 2004
--------------------------------------
Revenues $ 19,409,238 $ 16,252,270
Cost of revenues 15,801,366 13,912,356
------------------ ------------------
Gross profit 3,607,872 2,339,914
Selling, general and administrative expenses 2,238,904 2,642,341
Noncash Compensation 91,225 7,674,491
Loss on impairment of intangibles - 417,880
Loss on obsolete inventory - 130,883
Depreciation and amortization 941,079 1,615,803
------------------ ------------------
Operating income (loss) 336,664 (10,141,484)
Other income (expenses):
Interest income 18,130 6,032
Interest expense (1,947,283) (1,704,910)
Noncash interest expense (68,285) (1,561)
------------------ ------------------
Total Interest expense, net (1,997,438) (1,700,439)
------------------ ------------------
Other income 1,650 170
Other expenses (7,043) -
------------------ ------------------
Total other income (expenses) (5,393) 170
------------------ ------------------
Net loss $ (1,666,167) $ (11,841,753)
================== ==================
Net loss per common share basic $ (0.07) $ (1.33)
================== ==================
Net loss per common share diluted $ (0.07) $ (1.33)
================== ==================
Weighted Average Common Shares Outstanding
-Basic 25,179,895 8,912,513
================== ==================
-Diluted 25,179,895 8,912,513
================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
F-3
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Series A Preferred Common Stock
($.001 par value) ($.01 par value) Additional Deferred Total
------------------ --------------------- Paid-In Accumulated Compen- Stockhlders'
Shares Amount Shares Amount Capital Defict sation Deficit
---------- -------- ----------- -------- ------------ ------------- -------- -------------
Balance, December 31, 2003 - $ - 3,966,291 $15,865 $ 1,978,579 $ (1,665,667) $(6,250) $ 322,527
---------- -------- ----------- -------- ------------ ------------- -------- -------------
Preferred Stock in connection with
reverse acquisition 1,351,640 1,351 - - (1,351) - - -
Issuance of common stock for services - - 25,000 100 29,900 - - 30,000
Issuance of options to employees
and consultants - - - - 5,304,418 - - 5,304,418
Exercise of stock options - - 62,500 250 24,750 - - 25,000
S corporation distributions - - - - - (270,010) - (270,010)
Issuance of shares for payment on
Available Money, Inc. - - 1,470,589 5,882 1,994,118 - - 2,000,000
Note Discount on 25,000 warrants
issued - - - - 8,846 - - 8,846
Pursuant to original merger agreement
Series A Preferred Stockholders,
received 10 shares MCAM per preferred
share (1,351,640) (1,351) 13,516,400 54,066 (52,715) - - -
Conversion of beneficial interest
dividend - preferred stockholder's
received 11.5 shares instead of 10 - - 2,027,460 8,109 1,025,492 (1,033,600) - 1
Common stock issued for canceled
warrants - - 4,370,013 17,480 2,271,020 - - 2,288,500
Canceled shares in connection with
Available Money, Inc. Purchase - - (1,470,589) (5,882) (1,994,118) - - (2,000,000)
Amortization of deferred compensation - - - - - - 6,250 6,250
Change in par value - - - 143,806 (143,806) - - -
Net Loss - - - - - (11,841,753) - (11,841,753)
---------- -------- ----------- -------- ------------ ------------- -------- -------------
Balance, December 31, 2004 - - 23,967,664 239,676 10,445,133 (14,811,030) - (4,126,221)
---------- -------- ----------- -------- ------------ ------------- -------- -------------
Issuance of common stock for services - - 75,000 750 57,000 - - 57,750
Sale of common stock, net of offering
costs of $22,500 - - 984,314 9,843 469,657 - - 479,500
Exercise of stock options and warrants - - 180,000 1,800 - - - 1,800
Benficial conversion feature for 112,500
warrants - - - - 190,337 - - 190,337
Issuance of 60,000 warrants to
consultants for services - - - - 27,414 - - 27,414
Net Loss - - - - - (1,666,167) - (1,666,167)
---------- -------- ----------- -------- ------------ ------------- -------- -------------
Balance, December 31, 2005 - $ - 25,206,97 $252,069 $ 11,189,541 $(16,477,197) - $ (5,035,587)
========== ======== =========== ======== ============ ============= ======== =============
The Accompanying notes are an intergral part of these consolidated financial statements.
F-4
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
Years Ended
December 31,
------------------------------------
2005 2004
----------------- ---------------
Cash flows from operating activities:
Net loss $ (1,666,167) $ (11,841,753)
Adjustments used to reconcile net loss
to net cash provided (used) by operating
activities:
Depreciation and amortization 941,079 1,615,803
Amortization of debt discount 68,313 1,561
Inventory write-down - 130,883
Loss on impairment of intangibles - 417,880
Issuance of common stock for services 57,750 -
Issuance of stock options for services - 4,877,050
Issuance of warrants for services 27,414 2,760,426
Increase (decrease) in:
Accounts payable (45,219) 822,288
Accrued interest 34,071 -
Accrued expenses 54,187 47,785
Commissions payable 197,144 1,009,211
(Increase) decrease in:
Prepaid expenses and other current
assets 34,074 39,146
Accounts receivable 465,424 (782,498)
Proceeds from refundable deposit 43,200 -
Deposits (100,000) -
----------------- ----------------
Net cash provided (used) by operating
activities 111,270 (902,217)
Cash flows from investing activities:
Cash received in acquisition - 27,398
Purchases of property and equipment (171,338) (157,391)
Cash paid for acquisition and
intangible assets (496,176) (4,109,381)
Cash paid for loan cost on
convertible debt (15,525) -
----------------- ----------------
Net cash used by investing
activities (683,039) (4,239,374)
Cash flows from financing activities:
Net change in lines of credit 1,919,869 5,501,523
Capital lease obligation - 95,722
Payments on capital lease obligation (105,515) (18,356)
Proceeds (Repayments) in loans payable (500,000) 2,000,000
Advances (to) from officer (164,575) 192,280
Proceeds from notes payable 25,000 183,443
Payments on notes payable (140,135) -
Proceeds from issuance of convertible
promissory notes 700,000
Decrease (increase) in loans receivable - (43,000)
Increase in dividens payable - 23,710
Sale of common stock, net of $22,500 of
offering costs 479,500 -
Exercise of stock options and warrants 1,800 25,000
Dividends - (270,010)
----------------- ----------------
Net cash provided by financing
activities 2,215,944 7,690,312
NET INCREASE IN CASH 1,644,175 2,548,721
CASH, beginning of year 4,620,673 2,071,952
----------------- ----------------
CASH, end of year $ 6,264,848 $ 4,620,673
================ ================
Supplemental disclosures:
Cash paid during the period for interest $ 1,947,283 $ 1,700,439
================ ================
Non-cash transactions affecting
investing and financing activities:
Acquisition of software $ 43,000 -
================ =================
Acquistion of equipment under
capital lease $ 246,388 -
================ =================
Exchange for reduction in note
payable due to litigation $ 150,000 -
================ =================
Exchange for reduction in loan payable
due to litigation $ 1,500,000 -
================ =================
Reduction of loan payable officer in
exchange for related accrual $ 175,000 -
================ =================
Record beneficial conversion feature
for convertible debt and Detachable
warrants $ 190,337 -
================ =================
Settlement with Vendor $ 170,000 -
================ =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Note 1 - Organization
Money Centers of America Inc. (the "Company" or "MCA"), a Delaware corporation,
was incorporated in October 1997. The Company is a single source provider of
cash access services, ONSwitch(TM) Transaction Management System, and the Omni
Network. The Company has combined advanced technology with personalized customer
services to deliver ATM, Credit Card Advance, POS Debit, Check Cashing Services,
CreditPlus (outsourced marker services), cash access host program, customer data
sharing and merchant card processing.
On January 2, 2004, pursuant to an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") by and among the Company, Christopher M.
Wolfington, iGames Entertainment, Inc., a Nevada corporation ("iGames"), Michele
Friedman, Jeremy Stein and Money Centers Acquisition, Inc., a wholly-owned
subsidiary of iGames, Money Centers Acquisition, Inc. was merged with and into
the Company and the Company, as the surviving corporation, became a wholly-owned
subsidiary of iGames (the "Merger"). For accounting purposes, the transaction
was treated as a recapitalization and accounted for as a reverse acquisition.
Therefore, the financial statements reported herein and accompanying notes
thereto reflect the assets, liabilities and operations of the Company as if it
had been the reporting entity since inception. In connection with the Merger,
all of the issued and outstanding shares of capital stock of the Company were
tendered to iGames and iGames issued to the Company stockholders an aggregate of
1,351,640 shares of iGames Series A Convertible Preferred Stock, $.001 par value
per share, and warrants to purchase an aggregate of 2,500,000 shares of iGames
common stock, par value $.004 per share, at an exercise price of $.01 per share.
Each share of Series A Convertible Preferred Stock was entitled to ten votes in
all matters submitted to a vote of iGames shareholders and was convertible at
the option of the holders into ten shares of common stock at any time after the
date on which iGames amended its articles of incorporation to increase the
number of authorized shares of its common stock to at least 125,000,000. In
October 2004 iGames was merged into the Company, and each share of Series A
Convertible Preferred Stock was exchanged for 11.5 shares of the Company's
common stock. In October of 2004 the holder of the Series A Convertible
Preferred Stock received 11.5 shares of the Company's common stock, which
conversion rate was amended by the Board of Directors. The increase of 1.5
common shares per share of preferred totaling 2,027,460 of the Company's common
stock was valued at $1,033,601 treated as a dividend and recorded as an increase
in accumulated deficit.
Pursuant to the terms of a Stock Purchase Agreement between iGames, Helene Regen
and Samuel Freshman dated January 6, 2004 (the "Stock Purchase Agreement"),
iGames acquired all of the issued and outstanding shares of capital stock of
Available Money, Inc. (AM)(Wholly owned subsidiary), a provider of ATM cash
access services based in Los Angeles, California. The purchase price of this
transaction was $3,850,000, $2,000,000 of which was paid in cash at closing and
$1,850,000 of which was paid in cash on April 12, 2004. $2,100,000 of the
purchase price was assigned to contract rights. Acquired contract rights are
considered to have a finite life, pursuant to SFAS 142, to be amortized over the
period the asset is expected to contribute to future cash flows. MCA expects the
period to be 1 to 4 years. The contract rights will also be subject to periodic
impairment tests.
F-6
Note 2 - Basis of Presentation and Significant Accounting Policies
(A) Basis of Presentation
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). The
consolidated financial statements include the accounts of the Company and its
subsidiary. All material intercompany balances and transactions have been
eliminated. The Company and its subsidiary have fiscal years ending on December
31.
(B) Principles of Consolidation
The Company consolidates its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(C) Use of Estimates
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the periods presented. Actual
results may differ from these estimates.
Significant estimates during 2005 and 2004 include depreciable lives on
equipment, the valuation of stock options granted for services, the value of
warrants issued in connection with debt related financing, valuation of
intangible assets not having finite lives and the valuation allowance for
deferred tax assets since the Company had continuing operating losses.
(D) Cash and Cash Equivalents and Compensating Balances
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with an original maturity date of three months or less to be
cash equivalents.
The Company minimizes its credit risk associated with cash by periodically
evaluating the credit quality of its primary financial institution. The balance
at times may exceed federally insured limits. At December 31, 2005, the balance
exceeded the federally insured limit by $148,105. In addition, the Company
maintains a significant amount of cash at each of the casinos. Management
believes that the Company has controls in place to safeguard these on-hand
amounts, and that no significant credit risk exists with respect to cash.
Additionally, the Company had $30,000 maintained under a compensating balance
agreement. The $30,000 is retained due to potential dishonorment of bad checks
that are unforeseen. There is an informal agreement between our bank and our
lender that requires this compensating balance agreement.
F-7
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(E) Restricted Cash
Restricted cash is the balance of cash that is in the Company's bank accounts
and network that is used as collateral for our asset based lender (See Note 5).
The Company does not have access to this cash unless there is an amount over and
above the required amount of collateral. In order to pay operating expenses, the
Company requests that the asset based lender transfer funds into the Company's
unrestricted cash accounts. The restricted cash balance at December 31, 2005 was
$4,277,447.
(F) Accounts Receivable
Accounts receivable arise primarily from ATM, credit card advances and check
cashing services provided at casino locations. Concentration of credit risk
related to ATM and credit card advances are limited to the processors who remit
the cash advanced back to the Company along with the Company's allocable share
of fees earned. The Company believes these processors are financially stable and
no significant credit risk exists with respect to accounts receivable arising
from credit card advances. Accordingly, no allowance was considered necessary at
December 31, 2005 and 2004.
(G) Equipment
Equipment is stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Equipment consists
primarily of cash access devices and computer equipment. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which ranges from three to seven years.
(H) Long Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell the asset. There were no impairment charges taken during the years
ended December 31, 2005 and 2004.
F-8
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(I) Goodwill, Intangibles and Related Impairment
Based on the discounted estimated cash flows of the Company over the remaining
amortization period, the Company's carrying values of the assets would be
reduced to their estimated fair values. Goodwill is assumed to have an
indefinite life pursuant to statement of Financial Accounting Standards No. SFAS
142, "Goodwill and Other Intangible Assets" and accordingly is not amortized but
subject to periodic impairment tests. Acquired contract rights are considered to
have a finite life, pursuant to SFAS 142, to be amortized over the period the
asset is expected to contribute to future cash flows. The Company expects the
period to be 1 to 4 years. The contract rights will also be subject to periodic
impairment tests. In accordance with SFAS No. 142, the Company is required to
evaluate the carrying value of its intangible assets (goodwill) subsequent to
their acquisition.
(J) Internal Use Software and Website Development Costs
The Company has adopted the provisions of AICPA Statement of Position ("SOP")
98-1, "Accounting for the Costs of Software Developed or Obtained for Internal
Use", and Emerging Issues Task Force ("EITF") Consensus #00-2. "Accounting for
Website Development Costs." The type of costs incurred by the Company in
developing its internal use software and Website include, but are not limited to
payroll-related costs (e.g. fringe benefits) for employees who devote time to
the internal use computer software or Website project, consulting fees, the
price of computer software purchased from third parties and travel expenses
incurred by employees or consultants in their duties directly associated with
developing the software. These costs are either expensed or capitalized
depending on the type of cost and the stage of development of the software and
Website.
The Company makes ongoing evaluations of the recoverability of its capitalized
internal use software and Web site by comparing the amount capitalized for each
module or component of software to their estimated net realizable values. If
such evaluations indicate that the unamortized costs exceed the net realizable
values, the Company writes off the amount by which the unamortized costs exceed
the net realizable values. At December 31, 2005 and 2004, no such write-offs
were required.
At December 31, 2005, the net book value of capitalized software was $885,403.
Amortization expense for the years ended December 31, 2005 and 2004 was $7,897
and $7,209, respectively.
(K) Deferred Financing Costs
Deferred financing costs are capitalized and amortized over the term of the
related debt. At December 31, 2005, the gross amount of deferred financing costs
was $ 176,283 and related accumulated amortization was $ 110,935. At December
31, 2005 the company reflects in the accompanying consolidated balance sheet net
deferred financing costs of $65,348. Amortization of deferred financing costs
was $47,501 and $44,282 at December 31, 2005 and 2004, respectively.
F-9
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(L) Derivative Liabilities
In order to determine whether the Company has derivative liabilities, the
Company reviewed SFAS No. 133, SFAS No. 150, EITF No. 00-19 and EITF No. 05-02,
"The Meaning of Convertible Debt Instrument in Issue No. 00-19".
Pursuant to the terms of the Company outstanding convertible debt and the
associated detachable freestanding warrants, management determined that no
instruments should be classified as a derivative liability. Additionally, there
are no other issued and outstanding instruments which require the application of
the aforementioned accounting guidance.
(M) Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 104 for revenue recognition. In general, the
Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably assured.
The following policies reflect specific criteria for the various revenues
streams of the Company:
(1) ATM's and Credit Cards
Fees earned from ATM and credit card advances are recorded on the date of
transaction.
(2) Check Cashing
Revenue is recorded from fees on check cashing services on the date the check is
cashed. If a customer's check is returned by the bank on which it is drawn, the
full amount of the check is charged as bad debt loss. The check is subsequently
resubmitted to the bank for payment. If the bank honors it, the amount of the
check is recognized as a negative bad debt expense. Based on the quick
turnaround of the check being returned by the bank on which it is drawn and the
resubmission to the bank for payment, the Company feels this method approximates
the allowance method, which is a Generally Accepted Accounting Principle. Based
upon past history no allowance was considered necessary at December 31, 2005 and
2004, respectively.
(N) Cost of Revenues
The cost of revenues primarily includes commissions paid, non management wages,
employee benefits, bad debts, rents paid to contract lessors, transaction
processing costs, cash replenishment fees, non-capitalizable operating lease
fees for ATM's and repairs and maintenance of ATM's.
F-10
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(O) Advertising
In accordance with Accounting Standards Executive Committee Statement of
Position 93-7, ("SOP 93-7") costs incurred for producing and communicating
advertising of the Company, are charged to operations as incurred. Advertising
expense for the years ended December 31, 2005 and 2004 were $44,744 and $28,381,
respectively.
(P) Income Taxes
The Company accounts for income taxes under the Financial Accounting Standards
No. 109 "Accounting for Income Taxes" ("Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period, which includes the enactment date.
(Q) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, accounts payable and accrued expenses,
commissions payable, notes payable, convertible notes payable, net of debt
discount, line of credit and due to related party approximate fair value due to
the relatively short period to maturity for these instruments.
(R) Earnings per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share", basic earnings per share is computed by dividing the net
income (loss) less preferred dividends for the period by the weighted average
number of shares outstanding. Diluted earnings per share is computed by dividing
net income (loss) less preferred dividends by the weighted average number of
shares outstanding including the effect of share equivalents. Common share
equivalents consist of shares issuable upon the exercise of certain common stock
purchase warrants, stock options, and convertible preferred stock. The Company
has excluded these common share equivalents from its computation of earnings per
share due to their antidilutive
F-11
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
effect as the Company has reflected a net loss at December 31, 2005 and 2004,
respectively. Accordingly, the basic and diluted EPS are the same.
At December 31, 2005 and 2004 there were 6,671,111 and 5,240,688 shares of
issuable common stock underlying the options, warrants and convertible debt
securities, respectively.
The following table summarizes all common stock equivalents outstanding at
December 31, 2005 and 2004, respectively.
2005 2004
---- ----
Common stock options 3,602,500 3,161,250
Common stock warrants 1,457,500 2,079,438
Convertible notes payable 1,611,111 -
----------- -----------
Total Common Stock Equivalents 6,671,111 5,240,688
=========== ===========
(S) Stock Based Compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
During 2005 and 2004, the Company granted 477,500 and 2,967,500 options,
respectively to employees that were accounted for pursuant to APB No. 25.
During 2005 and 2004, the Company granted 172,500 and 490,000 options,
respectively to non-employees that were accounted for pursuant to SFAS No. 123.
In connection with stock option exercises/conversions, the Company's Board of
Directors approves all such issuances at the time when the investor completes
the proper paperwork and makes a formal notification exercise.
See detailed discussion of stock based compensation in Note 9.
F-12
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
(T) Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board issued Statement No.
151 (SFAS 151), "Inventory Costs", an amendment of ARB No. 43, Chapter 4. SFAS
151 clarifies that abnormal amounts of idle facility expense, freight, handling
costs and wasted materials should be recognized as current period charges. In
addition, SFAS 151 requires that allocation of fixed production overhead to
inventory be based on the normal capacity of the production facilities. SFAS 151
is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company currently believes that the adoption of SFAS 151 will
not have a material impact on its financial position, results of operations and
cash flows.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
companies are required to measure the compensation costs of share-based
compensation arrangements based on the grant-date fair value and recognize the
costs in the financial statements over the period during which employees are
required to provide services. Share-based compensation arrangements include
stock options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. In March 2005 the SEC
issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107 expresses views
of the staff regarding the interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the U.S. Securities and Exchange Commission adopted a new rule
amending the compliance dates for SFAS 123R. Companies may elect to apply this
statement either prospectively, or on a modified version of retrospective
application under which financial statements for prior periods are adjusted on a
basis consistent with the pro forma disclosures required for those periods under
SFAS 123. The Company is currently evaluating which transitional provision and
fair value methodology it will follow. The Company expects that any expense
associated with the adoption of the provisions of SFAS 123R will have a material
impact on its results of operations. We are evaluating the requirements of SFAS
No. 123(R) and SAB 107 to assess what impact its adoption will have on our
financial position, results of operations and cash flows. Effective January 1,
2006, the Company has fully adopted the provisions of SFAS No. 123R and related
interpretations as provided by SAB 107.
In May 2005, the Financial Accounting Standard Board ("FASB") issued Statement
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements" (SFAS 154). SFAS 154 changes the requirements for
the accounting for, and reporting of, a change in accounting principle.
Previously, most voluntary changes in accounting principles were required to be
recognized by way of a cumulative effect adjustment within net income during the
period of the change. SFAS 154 requires retrospective application to prior
periods' financial statements, unless it is impracticable to determine either
the period-specific effects or
F-13
Note 2 - Basis of Presentation and Significant Accounting Policies, continued
the cumulative effect of the change. SFAS 154 is effective for accounting
changes made in fiscal years beginning after December 15, 2005; however, the
Statement does not change the transition provisions of any existing accounting
pronouncements. We do not believe adoption of SFAS 154 will have a material
effect on our financial position, results of operations or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") issued EITF 05-2, "The
Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19". EITF
05-2 retained the definition of a conventional convertible debt instrument as
set forth in EITF 00-19, and which is used in determining certain exemptions to
the accounting treatments prescribed under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". EITF 05-2 also clarified that certain
contingencies related to the exercise of a conversion option would not be
outside the definition of "conventional" and determined that convertible
preferred stock with a mandatory redemption date would also qualify for similar
exemptions if the economic characteristics of the preferred stock are more akin
to debt than equity. EITF 05-2 is effective for new instruments entered into and
instruments modified in periods beginning after June 29, 2005. We adopted the
provisions of EITF 05-2 on July 1, 2005, which did not have a material effect on
our financial statements.
In July 2005, the FASB issued FASB Staff Position ("FSP") 150-5, "Accounting
Under SFAS 150 for Freestanding Warrants and Other Similar Instruments on
Redeemable Shares". FSP 150-5 clarifies that warrants on shares that are
redeemable or puttable immediately upon exercise and warrants on shares that are
redeemable or puttable in the future qualify as liabilities under SFAS 150,
regardless of the redemption feature or redemption price. The FSP is effective
for the first reporting period beginning after June 30, 2005, with resulting
changes to prior period statements reported as the cumulative effect of an
accounting change in accordance with the transition provisions of SFAS 150. We
adopted the provisions of FSP 150-5 on July 1, 2005, which did not have a
material effect on our financial statements.
In July 2005, the FASB issued EITF 05-6, "Determining the Amortization period
for Leasehold Improvements Purchased After Lease Inception or Acquired in a
Business Combination", which addressed the amortization period for leasehold
improvements made on operating leases acquired significantly after the beginning
of the lease. The EITF is effective for leasehold improvements made in periods
beginning after June 29, 2005. We adopted the provisions of EITF 05-6 on July 1,
2005, which did not have a material impact to the Company's financial position,
results of operations and cash flows.
(U) Reclassifications
Certain amounts previously reported for 2004 have been reclassified to conform
with the classifications used in 2005. Such reclassifications had no effect on
the reported net loss.
F-14
Note 3 - Equipment
The major classes of property and equipment at December 31, 2005 are as follows:
Classification Estimated Life
------------------- -------------------
Equipment 5 years $1,242,650
Furniture 5-7 years 101,578
-------------------
1,344,228
Less: accumulated depreciation (701,033)
-------------------
Equipment, net $ 643,195
===================
Depreciation expense for property and equipment for the years ended December 31,
2005 and 2004 was $227,041 and $168,873 respectively.
Of the totals presented above, capitalized equipment under capital leases had a
gross carrying value of $490,188 and accumulated depreciation of $130,710 at
December 31, 2005. (See Note 6) The equipment under capital lease serves as
collateral for the related lease obligation.
Note 4 - Acquisition, Intangible Assets and Goodwill
On January 6, 2004, iGames acquired the capital stock of Available Money, Inc.
("Available Money") a provider of ATM cash access services, which materially
represents the entire year of operations. This expanded our casino ATM business
but it also propelled the Company into non-casino related ATM businesses, such
as strip malls. The acquisition was accounted for under the purchase method of
accounting and the results of operations of Available Money are included in the
operations of the Company from January 6, 2004. The purchase price was
$6,000,000. The initial goodwill recorded on this purchase was approximately
$3,800,000. The remaining $2,100,000 was assigned to contract rights based on
the discounted projected cash flow from the contracts through their expiration
dates, using a 15% discount rate. The carrying value of intangible assets and
goodwill are reviewed if the facts and circumstances suggest that they may be
impaired.
During 2004, certain of the Available Money contracts were not renewed and the
Company has canceled 1,470,589 shares of stock issued to the former Available
Money shareholders, representing a $2,000,002 reduction in the purchase price,
the Company has accordingly lowered the goodwill recorded on the purchase by
$2,000,002, to approximately $1,831,000. As part of the settlement with the
former owners of AM the purchase price was reduced by $150,000 and the Company
reduced goodwill by $150,000 in March of 2005. As a result of the July 2005
settlements of litigation with Equitex, Inc. and Chex Services, Inc. (see Note
10 (4)) goodwill was reduced by $1,500,000 to approximately $200,000. The
$1,500,000 reduction was offset
F-15
Note 4 - Acquisition, Intangible Assets and Goodwill, continued
against a corresponding reduction in loans payable.
Intangible assets and Goodwill at December 31, 2005 are as follows:
(a) Intangible assets
Estimated Life
--------------------- ------------------
Software 15 Years $ 9,928
Software development costs 5-7 years 900,039
Website development costs 3 years 24,000
Contract rights 1-3 years 2,100,306
Other 3 years 5,108
------------------
3,039,381
Less: accumulated amortization (2,094,374)
------------------
Intangibles, net $ 945,007
==================
Amortization expense, for intangible assets, for the years ended December 31,
2005 and 2004 was $666,537 and $1,402,649 respectively.
Goodwill
Estimated Life 2005
--------------------- ------------------
Goodwill Indefinite $203,124
Goodwill is reviewed for impairment periodically. There were no impairment
charges taken for goodwill during the years ended December 31, 2005 and 2004,
respectively.
F-16
Note 4 - Acquisition, Intangible Assets and Goodwill, continued
The following table represents the balance of intangible assets over the next 5
years and thereafter:
Intangible assets Total 2006 2007 2008 2009 2010 Thereafter
subject to ----- ---- ---- ---- ---- ---- ----------
amortization
Gross capitalized $3,039,380 $3,039,380 $3,039,380 $3,039,380 $3,039,380 $3,039,380 $3,039,380
amount
Accumulated (2,070,373) (2,187,583) (2,294,560) (2,382,985) (2,471,410) (2,559,835) (3,039,380)
amortization ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Intangibles,net $ 945,007 $ 851,797 $ 744,820 $ 656,395 $ 567,970 $ 479,545 $ -
=========== =========== =========== =========== =========== =========== ===========
----------- ----------- ----------- ----------- ----------- ----------- -----------
Amortization expense $ 666,537 $ 93,210 $ 106,977 $ 88,425 $ 88,425 $ 88,425 $ 479,545
----------- ----------- ----------- ----------- ----------- ----------- -----------
Note 5 - Convertible Notes Payable, net of debt discount and Notes Payable
(A) Convertible Notes Payable, net of debt discount
During 2005, the Company borrowed an aggregate $700,000 from seven separate
individuals in the form of convertible promissory notes. Of the total
borrowings, $525,000 was received from related parties. These related parties
included family relatives of the Company's President and CEO totaling $500,000
and the Company's CFO for $25,000. In connection with the issuance of these
convertible promissory notes, the Company issued warrants to purchase an
aggregate 350,000 shares of its common stock at an exercise price of $0.01.
Pursuant to the terms of the convertible debt, the notes bear interest at 10%
with default interest at 25%. All notes are unsecured and due nine months from
issuance. The maturity dates occur during the period from June 2006 to September
2006. The debt is convertible at the option of the holder equivalent to an
amount that is 85% of the average mean of the closing bid and ask prices for the
10 days immediately preceding the conversion by the holder. The conversion terms
also contain a feature whereby the conversion price can not go below a floor
amount of $0.45 ("floor"). As a result of the established floor price on these
convertible debt instruments, the Company has determined that it has enough
authorized and unissued shares to settle all potential conversions related to
these debt instruments as well any other outstanding equity instruments that
areconvertible. These convertible debt instruments are not considered derivative
liabilities.
F-17
Note 5 - Convertible Notes Payable, net of debt discount and Notes Payable,
continued
Rather, pursuant to the literature in APB No. 14, EITF No. 98-5 and EITF No.
00-27, these instruments are considered convertible debt that requires an
allocation of proceeds between the convertible debt and related warrants.
Management used the following weighted average assumptions on the date of issue
when determining the fair value of the freestanding warrants issued in
connection with the convertible debt:
Expected dividend yield 0%
Expected volatility 175.48% - 176.68%
Risk free interest rate 4.25%
Expected life of option 2 years
Based on the required allocation of proceeds, the Company recorded an aggregate
debt discount totaling $184,013 which is being amortized to interest expense
over the lives of the related convertible promissory notes. The corresponding
credit was to additional paid-in capital. During 2005, the Company recognized
$61,366 as amortization of debt discount as a component of interest expense.
At December 31, 2005, the Company had the following outstanding convertible
notes payable:
Convertible notes payable $175,000
Convertible notes payable - related party 525,000
--------------
Total convertible notes payable 700,000
Less debt discount (122,647)
==============
Convertible notes payable, net of debt discount $577,353
==============
At December 31, 2005, the Company had the following outstanding accrued interest
payable for all convertible and non-convertible debt instruments:
Convertible notes payable - accrued interest $3,376
Convertible notes payable - related party - accrued
interest 14,034
Interest accrued on Notes Payable and Lines of Credit 96,956
Interest accrued on non convertible related note (see
Note 5(B)) 2,595
---------
Total accrued interest payable, Convertible notes $116,961
=========
F-18
Note 5 - Convertible Notes Payable, net of debt discount and Notes Payable,
continued
(B) Notes Payable, net of debt discount
During 2005, the Company recorded an aggregate $195,000 from two separate
individuals in the form of promissory notes. Pursuant to the terms of the notes,
the notes bore interest ranging from 10% - 19.75% with default interest of 25%.
The $170,000 note is collateralized by all assets of the company via an
intercreditor agreement. The $25,000 is uncollaterized. The maturity dates occur
during the period from September 2006 and May 2007.
Of the total, $170,000 was issued to a former customer in exchange for a mutual
release and settlement of a disputed $286,043 in commissions. The Company
recorded an offset to commissions expense for $116,043. The note bears interest
at 19.75% per annum. All accrued interest from November 1, 2004 through and
including November 1, 2005 was payable on November 1, 2005. Continuing on the
first day of each month thereafter to and including May 1, 2007 payments of
principal and interest in the amount of $10,989. At December 31, 2005, the
Company has repaid $8,191 in principal, leaving a remaining balance of $161,809.
In December 2005 the Company borrowed $25,000 and issued a $25,000 promissory
note, the Company recorded a debt discount of $6,324, related to the 12,500
warrants issued in connection with this note. At December 31, 2005, the Company
recorded amortization of debt discount totaling $703 as a component of interest
expense. The remaining $5,621 is being amortized over the life of the promissory
note.
On September 10, 2004, the Company borrowed $210,000 from a family member of our
chief executive officer to pay an advance on commissions to a casino. This note
is shown net of a discount of $8,846 for the value of warrants issued in
conjunction with the loan along with the corresponding amortization of the note
discount of $7,805. The discount of $8,846 is amortized over 17 months beginning
October 1, 2004. The note bears interest at 10% per annum and is payable
monthly, beginning October 1, 2004. The principal amount of this note is
repayable in monthly payments payable on the 1st day of each month commencing
with the second month following the month in which the Company commences
operations at the Casino. As additional consideration for extending the
principal amount of this loan to the Company, the Company has issued warrants to
purchase 50,000 of the Companys common stock at an exercise price of .33 per
share. In the event that the principal amount of this note plus all accrued
interest thereon was paid in full on or before March 31, 2006, 25,000 warrants
would be canceled. On September 10, 2004, the company recorded 25,000 warrants
at its fair value of $8,846 as additional interest expense and in March 2006 the
Company will record the remaining 25,000 warrants also as additional interest
expense as this note has been extended. During 2005, the Company repaid this
related party $131,943 in connection with this promissory note issued during
2004.
During 2005, the Company reflected aggregate principal repayments of $140,135
for all non-convertible promissory notes.
F-19
Note 5 - Convertible Notes Payable, net of debt discount and Notes Payable,
continued
At December 31, 2005, the Company had the following outstanding notes payable:
Notes payable $186,809
Notes payable - related party 70,000
----------
Total notes payable 256,809
Less debt discount (5,621)
==========
Note payable, net of debt discount $251,188
==========
Note 6 - Capital Leases
On February 1, 2005 the Company entered into a new capital lease for 6 ATM
machines at the Sandia Casino. The capitalized cost of the ATM machines is
$105,938. The terms of this lease require an approximately $30,000 down payment
90 days from installation with the remaining balance of approximately $75,000
will be financed over 59 months, at 8.211% for $1,500 per month. This note is
collateralized by the equipment.
Between June 15, 2005 and July 31, 2005 the Company entered into a new capital
lease for 5 ATM machines at the Tropicana Casino in Las Vegas. The approximate
capitalized cost of the ATM machines is $88,400. The terms of this lease require
an approximately $25,000 down payment 90 days from installation with the
remaining balance of approximately $63,000 financed over 59 months, at 8.211%
for approximately $1,330 per month. This note is collateralized by the
equipment.
In 2005 the Company entered into a new capital lease for 1 ATM machine at a
software development office located in Boca Raton, Florida. The capitalized cost
of the ATM machine is $18,000. The terms of this lease require an approximately
$5,000 down payment 90 days from installation with the remaining balance of
approximately $13,000 financed over 59 months, at 8.211% for $266 per month.
This note is collateralized by the equipment.
On July 16, 2005 the Company entered into a new capital lease for 2 ATM machines
at Jerry's Nugget Casino in Las Vegas. The capitalized cost of the ATM machines
is $34,500. The terms of this lease require an approximately $10,000 down
payment 90 days from installation with the remaining balance of approximately
$24,500 financed over 59 months, at 8.211% for $530 per month. This note is
collateralized by the equipment.
F-20
Note 6 - Capital Leases, continued
Capital lease obligations at December 31, 2005 consisted of the following:
Obligation under capital lease, imputed interest rate at $ 35,553
12.78%; due May 2007; collateralized by equipment
Obligation under capital lease, imputed interest rate at 32,988
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 32,988
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 69,081
7.95%; due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 8.3%; 11,411
due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 34,111
11.63%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 66,423
9.74%; due July 2010; collateralized by equipment
Less: current maturities (105,825)
-----------
Long term obligation, net of current portion $ 176,730
===========
Future minimum lease payments for equipment acquired under capital leases at
December 31, 2005 are as follows:
2006 $ 137,031
2007 69,944
2008 60,027
2009 56,185
2010 13,731
------------------
Total minimum lease payments 336,918
Less amount representing interest 54,363
------------------
Present value of net minimum lease 282,555
Less current portion 105,825
------------------
$ 176,730
==================
F-21
Note 7 - Lines of Credit
Lines of credit at December 31, 2005 consisted of the following:
Line of credit, maximum availability of $7,000,000, maturity date June 30, 2006.
Subject to various restrictive covenants, interest is payable monthly at 18% per
annum, borrowings are collateralized by restricted cash, all the assets of the
Company, 250,000 shares of common stock, and guaranteed by the principal
shareholder of the Company. The Company is required to pay a monthly facility
fee equal to 1/12% of the highest balance of the line during the month. At
December 31, 2005, the Company had recorded related accrued interest payable of
$58,225 in connection with this line of credit. $4,277,447
Line of credit, interest is payable monthly at 9% per annum, the line is
unsecured and due on demand. This line has been established with one of our
casino customers.
478,000
Lines of credit, non-interest bearing, the lines are unsecured and due on
demand. These lines have been established with two of our casino customers.
2,233,267
Line of credit, the line is unsecured and due on demand. The Company pays a
fixed stated amount of interest totaling $1,000 per month. The payments are
recorded and charged to interest expense. This line has been established with
one of our casino customers. At December 31, 2005, the Company had recorded
related accrued interest payable of $1,000 in connection with this line of
credit.
507,026
On April 12, 2004, the Company borrowed $2,050,000 from an asset-based lender to
make the second Available Money payment. From April 12, 2004 until June 30, 2005
all interest was accrued and added to the principal balance. The Company has
received a one year extension, with renewal subject to the lender's discretion.
This extension expires June 30, 2006. The note bears interest at 18% per annum.
This note is amortized over 5 years at $68,428 per month. At December 31, 2005,
the Company had recorded related accrued interest payable of $37,635 in
connection with this line of credit. The note is guaranteed by the majority
shareholder of the Company and also collateralized by all the assets of the
Company. 2,504,684
-------------
$10,000,424
=============
F-22
Lines of Credit
Note 8 - Due to Officer
During 2005, the Company issued a note to its CEO totaling $175,000. The note
was issued in payment of the CEO's 2004 guaranteed bonus. This loan and other
notes to our CEO bear interest at 10%, are unsecured and due on demand. The
outstanding principal and related accrued interest balance at December 31, 2005
was $326,580. Of the total, $2,000 represented accrued interest payable.
Note 9 - Stockholders' Deficit
Year Ended December 31, 2005
(A) Common Stock Issuances
(1) Cash
In January 2005, the Company raised $479,500, net of offering costs of
$22,500, from the sale of 984,314 shares of common stock at the price
of $0.51 per share. Offering costs have been recorded as a reduction
of additional paid-in capital.
(2) Services
In January 2005, the Company issued 75,000 shares of common stock to
its board of directors for services rendered. The Company valued the
shares at the fair value on the date of issuance which was $.77 per
share based on the quoted closing trading price and recorded non-cash
compensation of $57,750.
(3) Exercise of Options/Warrants
During the year 2005, the Company's former chief executive officer, an
affiliate, and an employee exercised an aggregate 180,000 options and
warrants at $.01 per share. The Company received proceeds of $1,800
from the transaction and issued 180,000 shares
F-23
Note 9 - Stockholders' Deficit, continued
(B) Accrued Penalty Shares
At December 31, 2005, pursuant to the terms of a prior common stock offering
with registration rights, the Company has accrued penalties in the amount of
135,000 shares. The Company has valued these shares at $78,798 based on the
quoted closing trading price every two weeks when the penalty accrues. The fair
value of the penalty has been recorded as a component of accrued expenses. In
February 2006, the Company's Form SB-2 was declared effective. Pursuant to the
terms of the original agreement once a registration statement had been declared
effective, accrual of penalty shares is no longer required. As of February 2006,
the penalty shares have ceased accruing.
(C) Stock Options
The Company follows fair value accounting and the related provisions of APB No.
25 for employees and SFAS No. 123 for all share based payment awards to its
non-employees. The fair value of each option or warrant granted is estimated on
the date of grant using the Black-Scholes option pricing model. The following is
a summary of all stock options and warrants activity with employees and
non-employees during 2005:
(1) Option Grants - Employees
During 2005, the Company granted an aggregate 477,500 stock options to
employees. The grants had exercise prices ranging from $0.33 to $0.77
per share. Of the total, 225,000 options had specific vesting
provisions. 200,000 options vest ratable over a two year period and
the remaining 25,000 options vest 50% in June 2006 and 50% in December
2006. These options had expiration dates ranging from 3 years to 10
years from the date of issuance.
(2) Options/ Warrants Exercised - Employees
In February 2005, the Company's former chief executive officer and an
affiliate exercised 150,000 warrants at $.01 per share. The Company
received proceeds of $1,500 from the transaction and issued 150,000
shares of common stock.
In June 2005, an employee exercised 30,000 options at $.01 per share.
The Company received proceeds of $300 from the transaction and issued
30,000 shares of common stock.
(3) Option Forfeitures - Employees
In August 2005, 6,250 shares of a previous employee's option with an
exercise price of $.40 expired.
F-24
Note 9 - Stockholders' Deficit, continued
(4) Weighted Average Assumptions for 2005 Option Grants - Employees
Exercise prices on grant dates $0.01 - $0.77
------------------------------------ ------------------------------
Expected dividend yield 0%
------------------------------------ ------------------------------
Expected Volatility 150% - 205%
------------------------------------ ------------------------------
Risk free interest rates 3%-4%
------------------------------------ ------------------------------
Expected lives of options 2-10 years
------------------------------------ ------------------------------
Employee stock option activity for the years ended December 31, 2005 and 2004
are summarized as follows:
Number of Shares Weighted Average Exercise Price
------------------------ ---------------------------------
Outstanding at December 31, 2003 193,750 $ 2.11
Granted 2,967,500 .02
Exercised - -
Cancelled/Expired - -
------------------------ ---------------------------------
Outstanding at December 31, 2004 3,161,250 $ .15
Granted 477,500 .49
Exercised (30,000) (.01)
Cancelled/Expired (6,250) (.40)
------------------------ ---------------------------------
Outstanding at December 31, 2005 3,602,500 $ .19
Weighted Average Fair Value of 2005
Grants .19
------------------------ ---------------------------------
The following table summarizes the Company's employee stock options outstanding
at December 31, 2005:
Options Outstanding
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
.01 2,875,000 8.01-8.06 .01
----------------------- ------------------------- --------------------- ----------------------
.33 127,500 2.00-2.96 .27
.42 200,000 8.46 .42
.70-.77 212,500 8.34-9.05 .75
2.00-2.28 187,500 7.50-7.84 2.11
-------------------------
3,602,500
=========================
At December 31, 2005 3,452,500 stock options are exercisable with a weighted average exercise price for $.18.
F-25
Note 9 - Stockholders' Deficit, continued
The exercise prices of all options granted by the Company equal the market price
at the dates of the grant. Had compensation cost for the stock option plan been
determined based on the fair value of the options at the grant dates consistent
with the valuation method of SFAS No. 123, "Accounting for Stock Based
Compensation", the Company's net loss and loss per share would have been changed
to the pro forma amounts indicated below for the year ended December 31, 2005.
Twelve Months Ended Twelve Months Ended
----------------------- ----------------------
December 31, 2005 December 31, 2004
----------------------- ----------------------
Net loss reported $(1,666,167) $(11,841,753)
--------------------------------- ----------------------- ----------------------
Add: total stock based (49,675) -
compensation expense determined
under fair value based method,
net of related tax effect
--------------------------------- ----------------------- ----------------------
Pro forma net loss $(1,715,842) $(11,841,753)
--------------------------------- ----------------------- ----------------------
Basic loss per share
--------------------------------- ----------------------- ----------------------
As Reported $(.07) $(1.33)
--------------------------------- ----------------------- ----------------------
Proforma $(.07) $(1.33)
--------------------------------- ----------------------- ----------------------
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as options vest over several years and
the Company may continue to grant options to employees.
(D) Warrants
On July 21, 2005, as part of a settlement agreement, the Company agreed to
deliver to Fastfunds Financial, Inc., Chex Services, Inc.'s corporate parent, a
contingent warrant to purchase up to
F-26
Note 9 - Stockholders' Deficit, continued
500,000 shares of our common stock at a purchase price of $0.50 per share. The
warrant is not exercisable until the Company achieves $1,000,000 in net income
during a fiscal year. This warrant has a term of ten years and expires upon a
change in control of the Company.
From September, 2005 to December 2005, pursuant to the terms of a software
development agreement the Company issued 60,000 warrants to purchase common
stock to a consultant at an exercise prices ranging from $.40 to $.51 per share,
as consideration for services rendered.
In September, 2005, the Company borrowed an aggregate $600,000 from three
individuals, including the uncle and the brother of its Chief Executive Officer
evidenced by convertible notes. The Company issued to one of the lenders
warrants to purchase 50,000 shares of our common stock at an exercise price of
$.01 per share. (See Note 5(A))
In October 2005, 644,438 warrants with an exercise price of $4.00 expired.
In October, 2005, the Company borrowed an aggregate $100,000 from three
individuals, including the Chief Financial Officer evidenced by convertible
notes. The Company issued to the lenders warrants to purchase 50,000 shares of
our common stock at an exercise price of $.01 per share. (See Note 5(A))
In December, 2005, the Company borrowed $25,000 from an individual evidenced by
a promissory note. The Company issued the lender warrants to purchase 12,500
shares of our common stock at an exercise price of $.01 per share. The Company
recorded a debt discount in the amount of $6,324 and as of December 31, 2005 has
amortized $703 of this debt discount. (See Note 5(B))
Warrant activity for the period ended December 31, 2005 is summarized as
follows:
Number of Weighted Average
Shares Exercise Price
--------------- ----------------
Outstanding at December 31, 2003 5,389,438 $ 4.19
Granted 490,000 .10
Exercised - -
Cancelled (3,800,000) .01
--------------- ----------------
Outstanding at December 31, 2004 2,079,438 $3.13
--------------- ----------------
Granted 172,500 .41
--------------- ----------------
Exercised (150,000) .01
--------------- ----------------
Cancelled (644,438) 4.00
--------------- ----------------
Outstanding at December 31, 2005 1,457,500 $2.72
=============== ================
F-27
Warrants Outstanding
-----------------------------------------------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
-------------------- --------------- ----------------- ----------------------
.01 327,500 6.73-8.06 .01
.33-.35 125,000 3.70-8.80 .35
.40-.44 30,000 9.76 .42
.47-.51 30,000 9.67-9.76 .49
1.00 75,000 2.50 1.00
2.40 112,500 2.82-7.25 2.40
4.00-6.00 757,500 1.25-2.50 4.68
---------------
1,457,500
=========
All outstanding warrants are exercisable at December 31, 2005.
Year Ended December 31, 2004
In December 2003 the Company affected a 1- for- 4 reverse stock split. As a
result, the Common stock par value was increased to $ .004 per share. All
amounts shown have been restated to account for this split.
In August 2004, with the approval of the Board of Directors, the Company
increased its authorized number of common stock issuable from 50,000,000 to
150,000,000 shares $.004 par value per share. Additionally, the Company is now
authorized to issue 20,000,000 shares of preferred stock $.001 par value per
share.
On January 2, 2004, iGames issued 1,351,640 shares of its Series A Preferred
Stock and warrants to purchase 2,500,000 shares of its common stock to the
stockholders of Money Centers of America, Inc. pursuant to an Agreement and Plan
of Merger dated November 26, 2003, in a transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof and Rule 506
thereunder. These shares of Series A Convertible Preferred Stock were converted
in October 2004 and each holder received 11.5 shares of the company's common
stock.
In accordance with the reverse merger accounting and the recapitalization of the
Company, iGames' accumulated deficit as of the date of the reverse merger on
January 2, 2004 has been restated as paid-in capital.
F-28
Note 9 - Stockholders' Deficit, continued
Additionally, in January 2004, the Company issued 25,000 shares of our common
stock to a consultant for services rendered. The Company valued these shares at
the fair value on the date of issuance and recorded consulting expense of
$30,000 or $1.20 per share. All of these shares were issued pursuant to Section
4(2) of the Securities Act.
On September 10, 2004, the Company borrowed $210,000 from an affiliate of our
chief executive officer to pay an advance on commissions to a new casino
customer. In connection with this note, the Company issued the lender warrants
to purchase 50,000 shares of our common stock at an exercise price of $.33 per
share. In the event that the principal amount of this loan plus all accrued
interest thereon is paid in full on or before March 1, 2006, then the Company
shall have the right to cancel warrants to purchase 25,000 shares. The Company
has valued these warrants at $8,846 or $0.37 per option options utilizing the
Black-Scholes options pricing model using the following assumptions: risk free
interest rate of 3.0%, volatility of 151.07%, an estimated life of five years,
and dividend yield of 0%.
In October of 2004 the holder of the Series A Convertible Preferred Stock
received 11.5 shares of the Company's common stock, which conversion rate was
amended by the Board of Directors. The increase of 1.5 common shares per share
of preferred totaling 2,027,460 of the Company's common stock was valued at
$1,033,601 treated as a dividend and recorded as an increase in accumulated
deficit.
In August 2004 the Company issued 4,370,000 shares as part of the iGames merger
to holders of preferred stock and warrants of iGames in excess of the respective
conversion rates as consideration for certain rights given up by the holders.
The shares were valued at the fair value on the date of issuance of $2,288,500.
During the year ended December 31, 2004, the Company issued capital
distributions relating to its previous status as an S Corporation of $270,010.
$2,000,000 of the Available Money purchase price was paid by tender of an
aggregate of 1,470,589 shares of common stock to the previous shareholders of
Available Money. All of these shares of common stock were cancelled prior to
December 31, 2004 pursuant to the terms of the Available Money Stock Purchase
Agreement.
In December 2004, the Company granted options to purchase 150,000 shares of its
common stock at an exercise price of $.01 per share to the owners of a software
development company as partial consideration for software development services.
The Company valued these options at $81,000 or $.54 per share. These shares were
issued pursuant to Section 4(2) of the Securities Act.
F-29
Note 9 - Stockholders' Deficit, continued
In January 2004, the Company issued options to purchase 2,695,000 shares of our
common stock to Christopher M. Wolfington and options to purchase an aggregate
of 590,000 shares of our common stock to 21 of our employees and consultants
under our stock option plan. The securities were issued in transactions exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
On September 10, 2004, the Company borrowed $210,000 from a family member of our
chief executive officer to pay an advance on commissions to an unrelated third
party. Pursuant to this note the family member was issued 25,000 warrants to
purchase our common stock at .33 per share.
In October 2004, the Company granted options to purchase 100,000 shares of its
common stock at an exercise price of $.35 per share to its former president in
connection with the termination of his employment agreement. These securities
were issued pursuant to Section 4(2) of the Securities Act. The former president
is currently a director.
Note 10 - Commitments and Contingencies
(1) Operating Leases
In connection with converting all of the Available Money ATM's, the
Company now pays rent to various mall properties where it has ATM
machines. These monthly rents average $45,000 per month.
The Company is party to a 39-month lease agreement pursuant to which it
rents office space in Pennsylvania at a monthly rent of $2,635. This
lease expires February 2008.
The Company's total rent expense under operating leases was $556,686
and $422,772 for the years ended December 31, 2005 and 2004,
respectively.
Estimated rent expense under non-cancelable operating leases over the
next five years is as follows:
2006 $ 369,197
-----------------------
2007 263,642
-----------------------
2008 236,242
-----------------------
2009 230,972
-----------------------
2010 155,485
-----------------------
Total $ 1,255,538
-----------------------
F-30
Note 10 - Commitments and Contingencies, continued
(2) Casino Contracts
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental fee to
operate at the respective gaming locations.
Typically, the fees are earned by the gaming establishment over the life of
the contract based on one of the following scenarios:
(A) A dollar amount, as defined by the contract, per transaction volume
processed by the Company.
(B) A percentage of the Company's profits at the respective location.
As of December 31, 2005 the Company has recorded $943,321 of accrued
commissions on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
(3) Employment Agreements
(A) CEO
(1) Employment Agreement
In January 2004, the Company entered into a five-year
employment agreement with our Chairman, President and Chief
Executive Officer. In addition to an annual salary of
$350,000 per year (subject to annual increases at the
discretion of the Board of Directors) (the "Base Salary"),
the employment agreement provides for a $200,000 signing
bonus, a guaranteed bonus equal to 50% of his Base Salary in
any calendar year (the "Guaranteed Bonus") and a
discretionary incentive bonus of up to 50% of his Base
Salary in any calendar year pursuant to a bonus program to
be adopted by the Board of Directors (the "Incentive
Bonus"). Pursuant to his employment agreement, the officer
is entitled to fringe benefits including participation in
retirement plans, life insurance, hospitalization, major
medical, paid vacation, a leased automobile and expense
reimbursement. At December 31, 2005, the Company had accrued
$43,750 for salary. Effective March, 2006 the Company
amended the executive's agreement to reduce his guaranteed
bonus for 2005 from 50% of his salary to 12.5% of his
salary.
F-31
Note 10 - Commitments and Contingencies, continued
(2) Commissions Payable
The company pays sales commission to sales persons closing
various contracts. The CEO was paid $39,621 in sales
commission for 2005.
(B) CFO
The Company entered into an agreement with its Vice
President of Finance and Chief Financial Officer (CFO) dated
June 14, 2005 (the "Employment Agreement") The employment
term commences on June 14, 2005 and continues until the
close of business on December 31, 2006, with automatic
annual renewals thereafter unless either party gives notice
of non-renewal at least thirty days prior to automatic
renewal. The officer's annual salary during the term of
employment under the Employment Agreement shall be no less
than $120,000. In addition, the officer was granted options
to purchase 200,000 shares of the Company's common stock
with an exercise price of $.42 per share under the Company's
Amended and Restated 2003 Stock Incentive Plan, pursuant to
an Award Agreement for Non-Qualified Stock Option dated June
14, 2005 entered into between the Company and the officer.
The options have a term of ten years and are exercisable as
follows: (a) 50,000 shall be exercisable immediately on the
date of grant; (b) 50,000 shall be exercisable on June 1,
2006; and (c) 100,000 shall be exercisable on June 1, 2007.
On October 20, 2005, the CFO's employment agreement was
amended to increase his annual salary to $145,000 and
decrease his maximum annual bonus compensation to $25,000.
(4) Litigation
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street") filed a
Complaint against iGames Entertainment, Inc. and Money Centers of America, Inc.
("MCA") (collectively referred to hereinafter as "iGames") in the United States
District Court for the Eastern District of Pennsylvania, alleging that iGames
breached an Asset Purchase Agreement ("APA") that the parties executed on or
about February 14, 2003. The suit also raises claims for fraudulent
misrepresentation and intentional interference with contractual relations. By
virtue of the APA, Lake Street sold to iGames all of Lake Street's right, title
and interest in a casino game called "Table Slots." Lake Street alleges that it
is entitled to additional compensation for the game that exceeds what was agreed
to. This matter is still in the pleadings stage and iGames has moved to dismiss
the plaintiff's claims for fraudulent misrepresentation and intentional
interference with contractual relations, as well as to strike all claims for
punitive damages. We are vigorously defending this action and believe that Lake
Street's claims for additional compensation and damages lack merit.
Effective July 21, 2005, the Company entered into a Settlement Agreement and
Mutual Release (the "Settlement Agreement") with Chex Services, Inc.("Chex"),
the wholly owned operating subsidiary of FastFunds Financial Corporation and
Equitex, Inc. ("Equitex"), pursuant to which
F-32
Note 10 - Commitments and Contingencies, continued
the parties agreed to resolve all pending litigation between them and release
all claims related to such litigation. The subject litigation is described in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004.
No party to the Settlement Agreement admitted any wrongdoing or liability
related to the litigation. The litigation was dismissed with prejudice on July
22, 2005.
Under the Settlement Agreement, Equitex and Chex agreed to cancel the Company's
outstanding $2,000,000 principal liability under a $2,000,000 promissory note
from the Company to Chex, dated January 6, 2004, as well as any liability for
accrued but unpaid interest under that promissory note. The Company agreed to
pay Chex $500,000 within 60 days of July 21, 2005. This amount was paid in
September 2005. In addition, the Company, agreed to deliver to Fastfunds
Financial Corporation a ten year warrant to purchase up to 500,000 shares of the
Company's common stock at a purchase price of $0.50 per share. The warrant is
not exercisable until the Company achieves $1,000,000 in net income during a
fiscal year.
In addition, the Company is from time to time during the normal course of its
business operations, subject to various litigation claims and legal disputes.
The Company does not believe that the ultimate disposition of any of these
matters will have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
Note 11 - Customer Concentrations
For the year ended December 31, 2005, approximately 44 % of total revenues were
derived from operations at two full service casinos. No other customers
represented more than ten percent of the Company's total revenues for the year
ended December 31, 2005. (See subsequent events)
For the year ended December 31, 2004, approximately 40% of total revenues were
derived from operations at 2 casinos. No other customers represented more than
ten percent of our total revenues for the year ended December 31, 2004.
Note 12 - Cash Rental Program and Related Interest Expense
Included in interest expense are monies owed to an unrelated vendor for interest
charges. The interest is based on the amount of cash in the Company's Available
Money ATM machines and network and is calculated on a daily basis. The balance
of this cash funded by the bank in the Company's ATM machines at December 31,
2005 was approximately $11.8 million. The interest rate on the $11.8 million is
prime plus zero. Effectively the company rents this cash. The Company does not
reflect this cash as an asset or the loan as a liability on its balance sheet at
year end. Interest expense from this cash was $544,321 for 2005.
F-33
Note 13 - Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) are as follows:
December 31,
---------------------------------------
Deferred tax assets: 2005 2004
------------------ ----------------
Net operating loss carryforwards $ 2,198,000 $ 1,807,000
------------------ ----------------
Accrued expenses 251,000 182,000
------------------ ----------------
Depreciation and amortization 57,000 57,000
Less valuation allowance (2,506,000) (2,046,000)
------------------ ----------------
Net deferred tax assets $ - $ -
================== ================
The reconciliation of the income tax computed at the U.S. federal statutory rate
to income tax expense for the periods ended December 31, 2005 and 2004:
December 31,
---------------------------------------
2005 2004
------------------ ----------------
Tax benefit at federal statutory $ 620,000 $ 4,005,000
rate (34%) ------------------ ----------------
Non-deductible stock compensation (85,000) (2,609,000)
------------------ ----------------
Non-deductible expenses (75,000) (390,000)
Net operating losses related to 0 824,000
mergers ------------------ ----------------
Change in valuation allowance (460,000) (1,830,000)
------------------ ----------------
Net income tax benefit $ - $ -
================== ================
FASB No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on weight of the evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a full valuation allowance at December 31, 2005 is necessary to
reduce the deferred tax assets to the amount that will more likely than not be
realized. At December 31, 2005, the Company has available net operating loss
carryforwards of approximately $6,465,000, which expire in the year 2021-2025.
$2,425,000 of the Net Operating Losses are subject to the limitations under
Section 382 of the Internal Revenue Code relating to changes in ownership in the
amount of $231,000 annually as calculated under code Section 382 of the Internal
Revenue Code.
F-34
Note 14 - Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a working capital
deficit of $6,896,428, a stockholders' deficit of $5,035,587 and an accumulated
deficit of $16,477,197 at December 31, 2005. The Company also reflected a net
loss of $1,666,167 and net cash provided by operations of $111,270, for the year
ended December 31, 2005. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
Management is in the process of implementing its business plan. Additionally,
management is actively seeking additional sources of capital, but no assurance
can be made that capital will be available on reasonable terms. Management
believes the actions it is taking allow the Company to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
Note 15 - Subsequent Events
In February 2006, an employee exercised 70,000 options at $.01 per share. The
Company received proceeds of $700 from the transaction and issued 70,000 shares.
In February 2006, a consultant exercised 5,000 warrants at $.01 per share. The
Company received proceeds of $50 from the transaction and issued 5,000 shares.
In March 2006, the Company issued two promissory notes in the amount of $50,000.
The notes bear interest at 10% per annum and all principal and interest is due
at maturity December 2006 or earlier at the option of the holder upon a Change
in Control. In the event that a Note is not repaid in full within ninety (90)
days following the maturity date, additional interest is due and payable in an
amount equal to twenty-five percent (25%) of the unpaid amount. Thereafter,
additional interest accrues each sixty (60) days in an amount equal to
twenty-five percent (25%) of the unpaid amount.
In April 2006, an employee exercised 25,000 options at $.01 per share. The
Company received proceeds of $250 from the transaction and issued 25,000 shares.
In April 2006, the Company was given notice that a casino customer will not
renew its contract which ends May 6, 2006. The Customer accounted for
approximately $5.3 million in revenue and approximately $460,000 in gross profit
for 2005.
F-35